Tax Planning Strategies to reduce your tax bill
I've put together some simple and highly effective gems that can help you save on your taxes, and maybe even help you build some savings and/or wealth.
The first thing to remember about taxes is that there is a distinct difference between evasion and avoidance. Avoidance is not going to land you in a prison cell. Avoidance is what good tax professionals are skilled at helping taxpayers accomplish.
Before we explore strategies, it is important for me to mention to all of you out there earning gig income selling goods and services online is that the IRS will know about it whether you report it or not. All banking institutions that process online payments report how much you made right the IRS every year. It is not worth it to be dishonest.
If you are earning income without a paycheck that takes out income taxes, you need a plan to stay good with the feds. One thing that is imperative to understand is that not all of the money you get is yours to keep. When earning wages, your employer takes out your taxes for you so you don't have to think about it. When earning money as a subcontractor, or by other means, you need to be contributing at minimum 20-25% towards your income tax bill. You can be penalized for not making regular Estimated Tax Payments. I highly encourage you to put that 20-25% or more depending on how much you are earning, somewhere where you aren't tempted to spend it. You can make payments towards your tax bill directly to the IRS using the IRS to Go app. Don't put it off! Don't neglect your responsibility. It's better to get a refund than to have to pay penalties for not paying on time.
My first suggestion is to start keeping track of everything! Chances are that you may have some deductions hidden on your bank statements that could help you come April. I suggest that you use a bookkeeping app. I personally like Wave Apps for most small business and freelancers. However, if you are a serious freelancer QuickBooks has a version called Quickbooks Self-Employed. Both have advantages and disadvantages, and there are many other options out there. These are just the ones I have the most experience with. The biggest advantage of QuickBooks Self-Employed is that like most QuickBooks products it easily imports to many tax software applications both on the tax preparer side and on the self-preparer side of things. The biggest advantage of Wave is that unless you are processing payroll, it's free to use and it comes with a business and personal account. Keeping track of your personal expenses is important when it comes to finding adjustments to income and deductions.
Some of my best and wealthiest tax clients are also the most organized with their finances.
Now let's talk about ways to save on your taxes.
Adjustments to income are the BEST!! These are expenses that reduce your taxable income. Think of them as deductions that everyone can take regardless of whether you itemize or not.
Charitable Contributions - EVERYONE can claim charitable contributions that are made regardless of whether you itemize or take the standard deduction. In 2021, the allowed deduction is increased from $300 to $600. This means that if you make contributions to a non-profit organization (Church counts) and have the receipts or bank transactions to prove it, you can take up to $600 of them as a deduction off of your income taxes. This is one of the many rewards for keeping track of your personal expenses.
Health Savings Account:
If you have a high deductible health insurance plan (who doesn't nowadays). High deductible means a deductible of $1400 for self-only, or $2800 for family coverage. If you open a Health Savings Account with a bank, you can deduct from your taxes contributions up to $3600 for individual or $7200 for family. IF you are over 55, you can deduct contributions of $4600 for individual or $8200 for MFJ if both spouses are over 55. HSA's are similar to IRAs in that there is a penalty for early withdrawal if the withdrawal is NOT to cover medical expenses. However, there are exceptions to this, too. Penalties are waived if a taxpayer is considered legally disabled, if the HSA distribution is part of an estate, and if the taxpayer is over 65.
IRA Contributions:
Chances are, if you work full-time for a company there is a 401k plan. However, if you don't have an employer sponsored plan, you can deduct contributions to an IRA. Most banks have a way to set one up for you, and your banker can discuss the advantages and disadvantages of the IRA options available. That said, if you make less than $66k individual, or $105 for MFJ, you can contribute a sizable bit of your income to an IRA and reduce your taxable income in the process. Single and HOH taxpayers can deduct up to $6K, and those over 55 can deduct up to $7K for 2021. Of course, there are rules and exceptions to this, but your tax preparer and/or banker can help you determine what options best suit your situation. For those of you making more than those amounts, some of your IRA contributions still may be deductible up to income thresholds set by the IRS. Check with your Tax preparer for the current thresholds and how the deduction is determined (it's math stuff).
Educator Expenses:
If you are a teacher, thank you for your hard work! The IRS wants to thank you too, in a small but significant way. Educators can take $250, or $500 if both spouses are teachers, off the top for expenses.
Student Loan Interest:
If you are part of my generation, you may likely be paying on those student loans for a long, long time. The good news is that the interest you are paying is deductible. Your Student Loan holder should be sending you a 1098 every year, include it on your tax return.
Self-Employment Deductions:
If you are working for yourself, then there is some advantages to it on your taxes. Some of your Self-Employment taxes are deductible, contributions to a SEP, SIMPLE qualified plans (this deduction can be rather significant), and Health Insurance premiums can be deductible. Talk to your tax professional about these options.
These are just a few ways to save money on your taxes for 2021. These options may be available for years past and/or years to come however the thresholds and dollar amounts will very likely be different. If you are interested in more ways to save on your taxes, talk with an experienced tax professional, tax planner, or even your favorite banker.
Be organized and be Prosperous,
~Jen
