The tax deadline is coming up, so I wanted to give you some timely advice on how to save money on your taxes this year. With a little know-how and a little bit of moving money around, you can save thousands of dollars.
Tip 1: Be Aware of Your Deductions
There are several deductions that can help you save money on your taxes. All it takes is mindfulness and, in some cases, the proper documentation.
Depending on your job, you may have business expenses that are common or necessary in your industry. These categories include capital expenses, cost of goods sold, business assets, and improvements.
Say that you’re an insurance broker who takes potential clients out for coffee or a business owner who occasionally treats their employees to a working lunch. Deductions for meal expenses might be something that applies to you. You can deduct only 50% of your business-related meal and entertainment expenses unless the expenses meet certain exceptions.
Self-employed people have a wide menu of deductions they can claim as well. Some of these include medical expenses, taxes paid, home mortgage interest, advertising (think everything from business cards to a professional LinkedIn account), utilities, as well as other expenses related to running your business. That means you can claim things like your Wi-Fi bill as a deduction on your income taxes if you work from home like so many people did this past year.
If you moved this past year, you might be able to deduct job-related moving expenses if they pass the time and distance test (moving at least 50 miles away and working full-time for at least 39 weeks during the 12 months that immediately follow your move.)
Lastly, donations made to charities, nonprofit organizations, and even churches can be deducted. Remember to have proper documentation! If you can’t find it before it’s time to file, try reaching out to the organization—they typically keep donor information (like receipts!) on file.
Tip 2: Know Your Tax-Free Income
There are many sources of income available that the IRS cannot legally tax. eFile has an extensive list of what qualifies as tax-free income, but here are a few items:
- Profit from the sale of your main home
- Employer-provided health insurance
- Credit card rewards and points
- Scholarships and grants
- Medical savings account withdrawals
- Social security benefits (if they are your only source of income.)
- Gifts / Inheritance
Tip 3: Adjust Your W-4
If you are a W-4 employee, you can change your withholdings at any time. It’s too late to make too much of a difference for this year’s returns, but in the future, remember that you can withhold more of your income each paycheck to reduce the amount you have to pay the IRS. Or, if you get a large return back this year and don’t want to live as skimpily from paycheck to paycheck, you can choose to withhold less.
Tip 4: Contribute to an IRA
There are two major independent retirement accounts: traditional IRAs and Roth IRAs. Roth IRAs have better tax-benefits in the long run because the money isn’t taxed after it’s taken out. For the 2020 tax year, you may not be able to deduct your contributions if a retirement plan at work covers you, you’re married and filing jointly, and your modified adjusted gross income was $124,000 or more. In 2021, that number rises to $125,000. There are limits to how much you can put in an IRA, too. For 2020 and 2021, the limits are $6,000 per year or $7,000 for people 50 or older.
Tip 5: Capitalize on College Expenses
Do you have kids in college? Or, are you attending yourself? The American Opportunity Credit can cut your tax liability by up to $2,500 if you’re paying for the first four years of higher education for yourself, your spouse, or a dependent you claim on your tax return. To qualify for this credit, the student must be enrolled at least half time and pursuing a degree at a college, university, vocational school, or other eligible postsecondary educational institution.
You may also be eligible for something called the Lifetime Learning Credit. This credit is worth 20% of up to $10,000 in eligible expenses, with a maximum credit of $2,000 per tax return. This can be used for graduate and undergraduate expenses as long as it’s from an eligible institution. And, you don’t have to be working towards a degree for this credit!
Tip 6: Adjust Your Basis for Capital Gains Tax
A capital gains tax is the type of tax applied to the profits earned on the sale of an asset. One of the reasons I love real estate is because of the tax benefits you can accrue. Investors, when you calculate the cost basis after selling a financial asset, make sure that you add your reinvested dividends back in. This will increase the cost basis, therefore reducing your capital gain when you sell the investment.
If you’re selling a house and the property’s value has risen, you might have to pay capital gains tax as well.
Single taxpayers can exempt up to $250,000 of their home’s appreciation from capital gains tax, and married couples can get up to a $500,000 exemption every two years. You can even reduce how much you owe if you’ve made home renovations or improvements.
Bonus Tip: Did you receive stimulus checks 1 & 2? If not, make that known when you file. You may be eligible to get that money back in the form of a tax return!
I hope that these tips will help you save money on your taxes this year. For more tips on how to become savvier with your money, I recommend buying my book, Money Mastery. It is my foundational text on building wealth where I share more of my journey and best practices!