20 Ways to SaVE on Your Taxes
Every tax year you look forward to saving the most on tax preparation fees and maximizing your tax refund. For some of you, if you look at your most recent check stub around this time of the year you will notice that you have paid somewhere around $3,000 in Federal taxes and $1,100 in State taxes (if applicable) and the year is not even over yet. Well, the idea is to get a refund for as much of those taxes you have paid when the tax season rolls around. Here are 20 ways to maximize on your tax returns:
1. Standard deduction vs Itemized deduction – whichever one sums up to be the most is the choice you want to go with. It used to be that if you own a home versus renting a home you will probably be better off claiming the itemized deduction due to the interest on your mortgage, among other things, paid throughout the year. However, with the new TCJA tax laws, the standard deduction have more than doubled what they used to be pre 2018 tax years. Also, keep in mind that your standard deduction varies according to your personal status in terms of single, married, etc.
2. State taxes vs Sales taxes – whenever you itemize your deductions you are given the option to deduct either your state taxes withheld throughout the year or a total of all the sales taxes you have paid throughout the year. If you have made any huge purchases throughout the year you may want to check if your sales taxes on those purchases plus sales taxes on all your other purchases add up to be more than your state taxes for the year.
Some people own planes, trains, and automobiles and I can tell you that the sales taxes on the fuel purchases alone for an airplane can add up to be a HUGE amount. Do you get the idea?
3. Home Equity line of credit vs Unsecured line of credit – the interest paid on your personal credit cards are not deductible; conversely, the interest paid on your home equity line of credit is deductible. So, if you have any major home repairs, home purchases, and so on it is probably better to use a home equity loan vs a personal credit card or cash, even if you have it freely available. Again, this is because you can deduct the interest paid every year. This is for those who itemize.
4. Business credit cards vs Personal credit cards – the same concept as the above applies here; the interest expense on your business credit card is deductible; the interest expense on your personal credit card is not. So don’t go buying your office desk and cabinets with your personal credit card; even though you may be able to deduct the purchase price itself for the purchase made with your personal card, you’d be better off also deducting the interest on the business card statements if you had used a business credit card. This is whether you itemize or not.
5. Standard mileage deduction vs Actual vehicle expense – the standard mileage deduction usually works out best if you have a newer car or a car that doesn’t require much maintenance and repairs expenses etc; the actual vehicle expense usually works out best if you have an older car that always needs repair work etc. Keeping good records in a log book for actual vehicle expense and miles driven really helps in determining which benefits you most. You are entitled to deduct only one of the two and this deduction is for vehicle use for business purposes only. This deduction used to be applicable whether you itemize or not. But since the enactment of the TCJA, it no longer allowed as an itemized deduction. It is only applicable for business tax return purposes (Schedule C is a business tax return wrapped up in a personal tax return).
6. Single status vs Married filing separately status – only claim married filing separately as a very last resort; you are better off claiming single for filing purposes vs married filing separately if justifiable. Some couples may not have much of a choice but to claim married filing separately. Your available list of deductions and credits are drastically reduced for the married filing separately personal status.
7. Choose your best Depreciation Method – depreciation expense is allowed for business purposes; usually an accelerated depreciation method works out better than straight line depreciation or some other methods. Generally, the more depreciation you can write-off right up front the better it is for your tax benefits. Consult your accountant; a little more strategy comes into play here. You may want to look at your projected financials among other things. Of course, the higher the dollar amount and volume of your business revenues and operations the more critical your depreciation strategy comes into play.
8. Medical Deductions – this is for those who really have a lot of medical related expenses in their household; typically $3K – $5K and more in medical expenses. If you are going to claim it then you better claim every bit of it. You would be surprise to know the list of items and services that are allowed as medical expense deductions. Again, after receiving your huge medical bill from your doctor and you decide it’s probably worth the deduction then go after all the other less obvious but qualifying medical expenses.
9. Savings – for what it’s worth due to the stock market and economic times, if you are going to save extra in addition to your 401k, 403B, etc you can choose a ROTH IRA. You may be entitled to a Retirement Savings Credit for the money you put into that ROTH IRA account. You should also know that you do not pay taxes on a ROTH when it is taken out later; earnings and income limitation apply.
10. School Loan vs Personal Loan – if you are going to pay for school out of pocket please apply for a school loan vs applying for a personal loan if you can help it. The interest paid on a school loan is deductible; the interest paid on a personal loan is not.
11. Plan your Educational Expenses – the maximum tax credit you can receive for educational expenses is $2,500; this is for your 1st four years of college. The credit is calculated as 100% of the 1st $2,000 in expenses and 25% of the next $2,000 for a total of $2,500 in credits. If you are going to spend more than $4,000 in out-of-pocket expenses for education do not spend more than $4,000 in one year; spending $6,000 would be losing out on $2,000 you can’t claim nor deduct on your taxes in that year. Plan and strategize your educational initiatives.
12. Education expense deduction vs Education credit – the maximum you can deduct for educational expense is $4,000; if you have the option to get a $1,000 educational credit, more than likely your best bet is to go with the $1,000. The $4,000 deduction will only work out to a savings or credit of the percentage of the tax bracket you are in (so if you are in the 15% tax bracket that’s only $600); the $1,000 credit is a dollar for dollar savings. Post TCJA tax era, education expense deduction as an “above the line” deduction is no longer available. However, the Education Credit is still available.
13. Making purchases that offers tax credits – it’s always nice to upgrade your home whether by choice or not. Well, if you find that you need to repair your windows, replace your water heater or central air system, or whatever the case may be, try to select an option that gives you a tax credit. There are many purchases that offer a tax credit such as water heaters, insulation windows, energy saving appliances, and on and on. Remember, a credit is a dollar for dollar tax benefit.
14. Job hunting expenses – whether you find new work or not you can claim your job hunting expenses; that is if you are job hunting in your same career field of work. Certain expenses such as resume services, placement ads, printing and mailing cost, out-of-pocket testing or placement exams, even going out of town for job interviews, and more are deductible as job hunting expenses. This is for those who itemize and these expenses and your other miscellaneous expenses add up to more than 2% of your AGI. Update: this is no longer available since the advent of the TCJA.
15. Moving expenses – unreimbursed moving expenses for your job are deductible providing that your new address is 50miles or more from your old address. Now who was it that moved to Ohio for a new job and to live but forgot all about claiming the moving expenses? Update: this is no longer available since the advent of the TCJA.
16. Qualifying widow/widower status – If your spouse dies and you have not remarried in the 2 years after his/her death and have an eligible child, you do not have to claim single as your personal status; you can claim the “Qualifying widow/widower” status for those two years. This personal status gives the same standard deduction as the married filing jointly status (about twice as much as the deduction for claiming single).
17. Gain from sale of investments vs Interest Income – Interest income is taxed at your personal tax bracket rate; long term capital gains are taxed at 0% – 15% max. It’s a bit of a gamble but if you were to gain $1,000 from savings on your CDs at the bank and you are in that 30% tax bracket then that is the rate of tax you would pay on your $1,000 interest income ($300). However, if you had stocks or bonds or other investments you had sold for a gain of $1,000 (and your investment was held over 1 year before sold) then the maximum tax you would pay is 15% ($150) on your capital gains.
18. Capital loss deduction – If you sold your capital assets for a loss then up to $3,000 is deductible from either other capital gains you had realized for the year or from other income such as your salary. This in turn lowers your taxable income which lowers your taxes and maximizes your refund. If your capital loss is more than $3000 in a year then you may carry forward the lost for the next 7 years.
19. Keep track of your business expenses – If you have a business and you are not keeping records of your transactions there is a possibility that you are letting a good deal of business related expenses slip through the cracks. These expenses are more than likely all deductible; keep good bookkeeping records or hire a bookkeeper or accountant; even his/her fee is deductible.
20. Monitor your income – depending on your personal status and your income level at some point one additional $1.00 can push you into a higher tax bracket; so it is possible that you go from a 15% to a 25% tax bracket; the biggest single bracket jump you could make throughout the different tax bracket levels. In other words, jumping from tax bracket #2 to tax bracket #3 gives the biggest percentage tax rate increase compared to jumping from tax bracket #1 to bracket #2 or bracket #3 to bracket #4 or bracket #4 to bracket #5. So be mindful, that second job may just not be worth it; you would end up paying more in taxes and potentially cancelling most or all of the extra income you make at job #2.
I’ve included below a couple extra tips to make up for those that are no longer available due to the TCJA.
21. Don’t forget to deduct your tax preparation fees – tax preparation expenses are deductible if you itemize your deductions; maximum tax refund wishes to all! Update: this is no longer deductible as an itemized deduction since the TCJA; however, tax preparation fees are deductible as a business expense for the preparation of business tax returns.
22. Self-Employment Health Insurance Premium deduction – typically, as a W2 employee working for an employer with great benefits, the employer often pays a huge portion of your health insurance premiums. However, as an entrepreneur, many self employed taxpayers have to pay their own health insurance premiums as a 100% out of pocket expense. In these cases, the health insurance premiums are fully deductible as an “above the line deduction” on their personal tax return.
Until next time, check in with us from time to time for more helpful tips to know as a small business owner.
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