Saving Money On Income Taxes

Most individuals spend a big chunk of their income paying taxes. This is largely due to the fact that they do not make themselves aware of new tax laws and tax credits that may be available to them. However, being well educated on the topic can lead to significant tax savings.

Charitable Donations

When filing your tax return, be sure to list each charity that you made a donation to in the calendar year. In other words, don’t include all the donations to different charities as a lump sum. Failure to properly list each contribution may result in the loss of certain tax benefits. When making a donation, remember to always request a receipt or a transaction record from your bank in order to provide the required proof.

When making a pledge to a charity, you will only be able to include the actual amount that was contributed in the calendar year. For example, if you pledge an amount and decide to make staggered payments that span the course of two calendar years, you may only claim the amount for the year that you are filing the return for.

It is also important to remember that clothing and other material items are no longer deductible unless they are in excellent condition.

Retirement Savings Plans

Individual retirement accounts are another good way to minimize your tax bill. However, be sure to do your research beforehand since not all contributions to individual retirement accounts are tax deductible. For example, if either you or your spouse is participating in a retirement plan that is sponsored by an employer, you may not be able to deduct your contributions. However, even if this is the case there are some ways around it. Your contributions may be deductible if your gross income combined with deductions such as student loan deductions and foreign property deductions are low.

If you are an entrepreneur, setting up a company retirement plan can also reduce your tax payable. You may be entitled to deduct your expenses that were used for the company plan. The amount that you will be able to deduct for your contributions will depend largely on the type of plan you have established. However, in most cases the tax savings are quite significant.

Flexible Spending Accounts

If the company you work for offers benefits, consider signing up for a flexible spending account if the option is available to you. The flexible spending account will reduce your taxes because the money is taken from your paycheck before the taxes have been applied. As a result, the amount of taxes you pay on the money that you earn will fall. When you submit a claim, the amount deducted from your paycheck will be given back to you.

For example, imagine that you are in a situation where you earn $50,000 per year. If you sign up for a flexible spending account and allow your employer to deduct $5000 per year, the income you earn that is taxed will fall from $50,000 to $45,000. Consider the situation where you spend the exact amount on an emergency medical procedure. If you present proof of these medical expenses, you will be refunded the amount in full.

Conclusion

If you are trying to minimize the amount of taxes you pay, there are many different ways to achieve this. The key is to make sure that you are well educated when it comes to tax laws and tax credits. The main reason why many individuals pay more taxes than they need to is because they are unaware of the tax saving options available to them.