Use this simple checklist to ensure that you’re getting the most out of taxes, while remaining confident that you’re not going to get a tap on the shoulder in the next 7 years :)
1. Get free (or inexpensive) help with your taxes
When you do your taxes on your own you run the risk of missing out on money saving deductions and credits. Make sure you are getting the most out of your taxes by looking for free help or inexpensive help from an online company. There are a few free assistance programs available to individuals/families below a certain income level, or for senior taxpayers. Search online to find one in your area. Paying a little bit for professional assistance can be a good value if you’re eligible for several deductions and tax credits.
2. Confirm your filing status
Depending on your family arrangement, you may be eligible to file as single, head-of-household, qualifying widow or widower, married filing jointly, or married filing separately.
The way you file affects your tax rates and the deductions you claim. Filing as head-of-household, married, or qualifying widower, for example, means you won't move to a higher bracket until you earn more income.
Take a minute to investigate which status you’re eligible for, to ensure you’re choosing the right one (with the most savings!)
3. Do the math! Itemizing vs Standard Deduction
It’s not as complex as it seems. You have the option to itemize instead of claiming the standard deduction. While the standard deduction allows you to deduct a flat amount from your taxable income, itemizing allows you to add up all your deductions and apply it the same way.
Itemized deductions are made up of a list of eligible expenses. If your eligible expenses don’t add up to as great of a deduction as the standard deduction, take the standard deduction!! You can claim whichever amount lowers your tax bill the most!
Keep in mind the standard deduction you receive varies depending on your filing status (reference item #1)
4. Saving for retirement reduces your taxes
Did you know that contributing to your workplace 401(k) can help you achieve big tax savings? You can deduct the entire amount of your contribution from your taxable income, up to annual limits. Depending on income, you may also be able to deduct contributions made to an IRA.
You can claim a deduction for contributing to these retirement accounts even if you don't itemize. We highly recommend trying to max out your contribution to meet the annual limit because the more you contribute the more you can save. You’re effectively reducing your tax bill while setting yourself up for a more secure future!
5. Deduct more by establishing a Heath Savings Account
If you have a qualifying high-deductible health plan, you are entitled to make deductible contributions to a HSA (Health Savings Account).
Contributing to a HSA has major tax advantages because you can deduct for contributions as you put money into the account and won't be taxed on withdrawals as long as you use the money for an eligible healthcare expense.
You have the option to either withdraw the funds from your HSA as you need them to pay for care, or you can keep the funds invested and let them grow!
6. Medical expenses can help you qualify for a deduction
If you itemize, as opposed to taking a standard deduction, you may be eligible to claim a deduction for medical expenses that exceed a certain percentage of your income. For 2020, you can deduct expenses that exceed 10% of your adjusted gross income.
Keep track of your medical expenses to see if you exceed the threshold. If you’re able, be smart about when you schedule procedures so you can bundle your medical costs into one year. This will help you to accrue enough medical expenses to get above the threshold that is required to make them deductible.
7. Children & Dependents tax credit
The Tax Cuts and Jobs Act raised the income level at which the child/dependent tax credit is available and doubled the amount you receive for this credit, providing significantly more tax savings.
A portion of this credit is even refundable, which means you're entitled to get money back if the credit value exceeds the taxes you owe.
Keep in mind that you’re entitled to a $500 credit for each additional dependent you are qualified to claim. If you provide financial support to extended family members or non relatives, you may qualify for this credit. Take a moment to investigate whether your contributions to a family/friend in need meet the definition of a dependent.
Additionally, adopting a child could entitle you to a tax credit (which helps supplement the expensive cost of adoption). The credit is available for every child you adopt, regardless of your method of adoption. The claim is available to those who privately adopt from a domestic agency, internationally adopt or adopt out of foster care. It is a non-refundable credit that can be carried forward for five years. There are limits to receiving tax credit for adoption, dependent on income levels.
8. Student loan and education credits
If you pay student loan interest, you can deduct up to $2,500 of the interest you pay from your taxable income. As an added bonus, you're entitled to claim this deduction even if you don't itemize, provided your income isn't too high.
The American Opportunity Credit and the Lifetime Learning Credit can both save you thousands on your tax bill if you pay eligible educational expenses for you or a dependent.
While the American Opportunity Credit is pretty restrictive in terms of who can qualify. However, the Lifetime Learning Credit is far more flexible and could entitle you to a deduction just for taking a class to improve your skills. Both of these tax credits are dependent on your income levels.
9. Claim credit for working
Have you heard of the Earned Income Tax Credit? Low and middle income families may be eligible for the EIT credit. Depending on your income, family size, and the amount you earn - it could be quite a valuable credit.
It is a refundable credit, meaning you can get back money even if you didn't pay enough taxes to cover the amount of the credit. You'll need to be sure to submit a tax return to claim the credit though.
10. See if you're eligible for a sales tax deduction
If you itemize your deductions, as opposed to taking the standard deduction, you can claim a deduction for up to $10,000 in state and local taxes paid.
If your state doesn't collect income taxes or if you didn't have much taxable income, claiming the sales tax deduction could maximize your savings. However, for many people, it also makes sense to claim a deduction for state income taxes.
11. Claim a deduction for pre-paid interest on a new mortgage
When you obtain a mortgage on your home, you have the option to buy points. Points reduce the interest rate you pay. Points are essentially prepaid interest.
If you do elect to buy points on a mortgage, you can claim a tax deduction on the cost. You're allowed to deduct mortgage interest on up to $750,000 of mortgage debt, so you can claim a credit for the full value of points if your debt is below that level.
If you meet certain requirements, points can be deducted in full in the year you buy them, including using your mortgage to acquire a new home or improve your home. If you took out a refinance loan and didn't use the proceeds for home improvement, you can deduct the points on a prorated basis over the life of the loan.
12. Energy-efficient upgrades can reduce taxes
Eligible home improvements for energy efficiency can qualify you for tax credits! Installing solar power or wind power, a geothermal heat pump, or making other eligible upgrades provide a dollar for dollar reduction on your taxes.
Not only will this help reduce the amount you pay the IRS, you could reap saving for years to come on your electric bill when you take advantage of these credits!
13. Investment tax considerations
Investment income is eligible to be taxed at a lower capital gains rate than wages from income, as little as 0%. Take advantage of the opportunity to earn income at a lower rate by making investments with your extra income. When you consider selling your investments, keep in mind that the low capital gains tax rates normally only apply to long term investments.
Did you know that losing investments can earn you a tax deduction? It is possible to offset your capital gains by claiming losses. In this case, you’d avoid paying income on your investments, depending on how much you gained/lost. A claim of capital losses can reduce your other taxable income by up to $3,000.
It might be a good idea to harvest tax losses by selling your poor performance investments, helping you to score some additional tax breaks.
14. Take advantage of deductions for business income
The Tax Cuts and Jobs Act changed the rules on business taxes. One of those changes involved introducing a deduction for up to 20% of business income for qualifying businesses.
The Qualified Business Income Deduction could be available even for sole proprietors who earn income from business activities. So if you have a side gig or run your own company, find out if you're eligible.
You should also keep track of other business expenses that qualify you for a deduction to reduce your taxable income even further.
Another big change that the Tax Cuts and Jobs Act made was cutting the corporate income tax rate (C-Corporations). If you run a business, make sure you've structured your company the right way to get the lowest tax rate for your situation.
While C-corporation puts you at risk of double taxation (since the company pays taxes and you also pay taxes on distributed profits), it makes sense to explore this option and others before selecting the right business structure for your entity.
We sincerely hope that this checklist helps you to file your taxes successfully (and beneficially!)
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