Are you trying to improve your tax situation? I got you! A lot of New Yorkers have the same question: “Why am I paying that much tax?” and the answer is pretty simple. It’s because you are not reaping the benefits the federal government offers you.
Tax is not just a bill that comes to your doorstep; you simply clear it. It’s complex work that requires careful consideration, strategic optimization of your income, and thoughtful decisions on spending.
Things feel confusing, right? Don’t worry! This blog will explain everything to optimize your tax situation. Additionally, there will be expert insights on each step to make things more clear.
Strategy 1: Apply for the Right Deductions
The IRS offers two ways to apply deductions to your taxes. You can either qualify for the standard deduction or the itemized deduction.
Standard Deduction:
A standard deduction is a fixed amount that is subtractable from a taxpayer’s income to lower taxable income. Although this fixed deduction can vary depending on your marital status, here are the details according to the IRS’s last updated data:
- $14,600 if filing separately as a single or married person.
- $29,200 in the case of a qualifying blind spouse or married couple filing jointly.
- $21,900 for the owner of the household.
You can also qualify for other standard deductions if you are older than 65 years or blind.
Itemized Deduction:
If you have different loans, home mortgages, casualties, and theft losses, you can claim deductions for them. Typically, itemized deductions are more beneficial. In other words, itemized deductions give you an edge over multiple taxes, including real estate taxes, mortgage interest, and miscellaneous deductions.
Standard vs. Itemized Deduction:
When you get a choice, think on your feet! If your itemized deduction exceeds the limit of the standard deduction, go for it. However, if you don’t have multiple interests and miscellaneous deductions, a standard deduction will be the better option. Here is a quick way to apply for the right deduction:
- Compile Documents: Gather all your documents, including your charity receipts, mortgage documents, statements, and all records of deductibles.
- Compare totals: Once you gather every bill, calculate the deduction amount. If it is higher than the standard $13,850, consider it or simply choose the standard deduction.
- Complete Schedule A: Use IRS Form 1044 to present your itemized deductions.
Preferably, you can consult with a tax professional for further clarification.
Strategy 2: Invest in IRA Programs
The next way to save on taxes is to invest in a reliable IRA (individual retirement account). You can say it’s a type of savings account that allows you to work on your retirement plan without paying taxes on it. The main idea is to minimize taxable income. However, they also offer multiple benefits, depending on the type of individual retirement account you choose.
Traditional IRA:
If you are looking for short-term tax deductions, a traditional IRA will be a good idea. When you transfer your money to an IRA, it becomes tax-free at the moment. However, withdrawals will be taxable, according to the IRS.
Your earnings and contributions are both charged at regular income tax rates on withdrawals. At the same time, the money grows tax-deferred while it’s in the account.
Roth IRA:
- Individual retirement accounts must be open for at least five years before you can apply for withdrawals.
- You can withdraw after the age of 59 ½.
- You can only put $7,000 annually, or $8,000 if you are over 50.
Strategy 3: Get Charitable Deducts
Charities are deductibles, as long as you are funding an eligible non-profit organization. In the United States, organizations that fall under Section 501(c)(3) are non-profit. However, to make your charity tax-exempt, you need to apply for itemized deductions and provide all receipts from charities.
Quick Note: You can generally apply for 60% deductions on your AGI (adjusted gross income) if it is all in cash. But taxes on properties, such as stocks and goods, are deductible differently.
Strategy 4: Claim All Available Credits
The federal government also offers credits with deductions. If you aren’t taking advantage of available credits, oh man! You are missing a lot. Credits are different from deductibles, and they can make your tax bill zero in some cases.
You can qualify for multiple credits at the same time. Concluding some common credits, consider EITC (earned income tax credit), child creit, adoption credit, saver credit, energy efficient credit, and life-time learning credit.
Strategy 5: Alter Your W-4 Form
A lot of people might be unaware of the fact that your W-4 form is alterable! You can change this form at any time of the year. This form is issued by the IRS, which you fill out and submit to your employer. It tells the employer how much tax to withhold from your income.
Be strategic here! Consider your last-year income tax report to see if you were eligible for a refund or owed something. Additionally, consider your salary hikes and bonuses. Too much tax withholding or too little can cause trouble. So try to strike the balance perfectly.
Although you can use the IRS calculator to calculate the right amount of withholding.
Strategy 6: Optimize Your Business Expenses
Self-employment doesn’t mean a burden of taxes without ease. The federal government and the NYC state government both offer deductions for self-employed people.
Self-employment means you own a home office that consumes electricity and the internet. Additionally, your car is used for business purposes. All these expenses are deductible. The IRS allows you to file a Schedule A form to claim your expenses. Let’s imagine a relatable situation:
- You have a specific bedroom that is only used for your business. It takes ⅕ part of your house, which means you can deduct ⅕ part of your home rent for it.
- Your internet and electricity bills’s portions are also deductible.
- If you own a car that is used for business purposes, you can deduct fuel and maintenance charges.
However, don’t try to act oversmart and mention details that don’t come into your business expenses, or you will land in audit territory. Talk with your tax preparer before making any significant moves.
Insidious tips: Plan your business trip and your family trip simultaneously. It will offer you some tax savings. However, the IRS might ask you for receipts, statements, and other details. So be prepared for it.
Common Tax Help Questions and Their Answers
1- How Do I Fix My Tax Situation?
- Hire a qualified CPA, EA, or tax adviser. Explain to them your tax situation and provide relevant documents. A tax advisory service can help you fix your tax situation.
2- How Do I Apply for Available Deductions?
- Consult with a tax advisory service and present your situation. They will explain what credit and deductions are available for you. Additionally, a tax consultant can help you proactively plan your taxes for the next year.
3- What are Refundable and Non-Refundable Credits?
Credits directly reduce your tax bills. Refundable credits can offer you money back if your tax bill goes below zero. On the other hand, non-refundable credits can be useful only if your bill is above zero.
In a Nutshell:
Tax situations can be tricky, especially when handling DIY. You can miss out on a lot of deductions and credits. It is better to go with a professional tax advisory service to get all the benefits. Their fee up front might look hefty, but the saving and deduction details they can provide are unbeatable.
Furthermore, if you are struggling to find the right tax advisory service, you have already found it. Yay! Tax King Services is a go-to solution for all your taxation needs. We take care of every tax situation for you.
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