Filing and paying taxes can be a hassle each year, but it doesn’t have to be expensive. In addition to understanding which tax breaks to claim, make sure to pay attention to these money-saving tips when filing your return.
1. Keep Receipts Throughout the Year
It can be hard to remember what you did yesterday, much less what you did throughout the previous year — but that’s exactly what you’re asked to do when you file your taxes. Forgetting some of your expenses, such as gifts to charity, business expenses or medical costs, could cause you to pay more in taxes than you’re required. To save the most money when filing taxes, keep records throughout the year of any expenses that qualify for tax deductions and tax credits, so you’ll have a full list when tax time comes around.
2. Be Prepared To Pay Taxes on Time — Even If You Can’t Afford It
When it comes to collecting what it’s owed, the IRS can be, well, demanding. Even if you file for a tax extension, you’re required to pay the amount you owe by the original filing date (this year is April 18). Failure to do so can trigger a wave of IRS penalties and fees.
3. Utilize Taxpayer Assistance and Counseling Programs
The IRS has multiple programs to help low-income taxpayers file their income taxes for free. The Volunteer Income Tax Assistance program has sites that you can visit to have your taxes prepared for free if your income is $60,000 or less, and VITA sites have IRS-certified volunteers who can file your return electronically. In addition, the Tax Counseling for the Elderly program specializes in providing free tax assistance for taxpayers ages 60 and older.
4. Use IRS Free File
You might still qualify to use the IRS’ Free File Software if your income is too high to qualify you for VITA assistance. When your income is less than $73,000, you can use the software from the IRS to file your federal tax return online for free. Plus, you might also be able to file your state tax returns for free.
When your income is $73,000 or more, you can use free, fillable forms from the IRS instead, but you have to know how to do taxes yourself as the instructions on the forms only provide basic guidance.
5. Make a Last-Minute IRA Contribution
For most deductions, if you haven’t qualified by the end of the calendar year, it’s too late when you file your taxes. The deadline for making IRA contributions, however, is your tax-filing deadline, not including extensions.
When you’re looking for a last-minute way to lower your tax bill, and you haven’t already maxed out your traditional IRA, you can contribute. Tell your financial institution to count the contribution for the prior year, or it will default to a current tax year IRA contribution.
6. Defer Income
Your income tax liability is directly tied to the amount of income you report in any given year. Thus, if you can lower the income you generate in a particular tax year, you can also lower the amount of tax you owe. While it doesn’t make sense to lower the actual income you’re paid just to avoid taxes, you may be able to defer some of your income into the next tax year, thereby avoiding tax on that money until the following year.
For example, if you’re paid a year-end bonus, see if you can request that it’s paid to you in January rather than in December. This way, you won’t have to report that income until the next tax year.
7. Give To Charity
No, you shouldn’t give all of your money away simply in an effort to avoid taxes. However, Americans by nature are generous of spirit. In 2020, for example, Americans made nearly $471 billion in charitable donations. If you’re a giving individual to begin with, don’t forget to claim your monetary reward by claiming those deductions on your taxes.
Granted, you’ll need to make a lot of donations to generate any additional tax benefit, as those claiming the standard deduction don’t enjoy any additional tax benefit from making charitable contributions. However, if you’re already itemizing — or if you can make enough charitable contributions to exceed the personal deduction threshold — then you can be financially rewarded for doing your good deeds.
8. Open a Health Savings Account
A health savings account is a great way to lower your lifelong taxes because there are so many tax benefits attached to it. In addition to getting a tax deduction on your contributions, your earnings grow tax-deferred, and you can actually withdraw all of your contributions and earnings tax-free if you use the money for qualified health expenses.
Before you contribute, however, be sure you are eligible. You’ll need to have a high-deductible health plan to qualify, which means a plan with a deductible of at least $1,400 for individual coverage, or $2,800 for family HDHP coverage for tax year 2022.
9. File For a Tax Extension
When you’re pressed for time to get your income tax return done by the April deadline, you can file for an extension to avoid a penalty. The IRS imposes a failure-to-file penalty equal to 5% of the taxes owed for each month or partial month that the taxes are late, up to a maximum 25% penalty. When your tax bill is $0, however, a penalty will not apply, as the penalty is the smaller of a fixed amount or a percentage of the amount you owe, which is zero.
10. Contribute To a 529 College Savings Plan
Are you tucking away savings for your kids’ future college expenses? Consider a 529 College Savings Plan. While contributions to these plans are not deductible on your federal taxes, some states do offer credits and deductions. But the biggest tax benefit of a 529 plan is that earnings within the plans can be withdrawn tax-free if used for qualifying college expenses. Rather than tucking your college funds into a savings account at a local bank, you can generate immediate tax benefits for yourself by choosing a 529 plan.
Of course, 529 plans aren’t as flexible as bank savings accounts, as the money is dedicated to school expenses and can’t be withdrawn without penalty. However, they can reduce your current income tax liability, so talk with your financial and tax advisers and see if they make sense for you.
11. Don’t Be Afraid of Deductions
Some taxpayers are so afraid of audits that they avoid taking certain deductions that they are legitimately entitled to. The home office deduction is a great example. There have been many articles published about how the home office deduction is a “red flag” for audits. However, if you’re self-employed and legitimately use a home office, you are entitled to take that deduction. (Keep in mind, though, that if traditional W2-filing employees who work remotely or from home can’t claim this deduction.) Audits overall remain rare — in 2019, for example, only 0.45% of returns were selected for audit. But, even if you are audited, you have nothing to fear if you have the documents to back up your deductions.
Keeping More of Your Return
No matter what your income, you have options to save money when you file your return. From free-file options to helping you maximize your deductions, following these tips minimizes the expense of filing your taxes. Paying what you legally owe is required, but paying a fortune isn’t.
Michael Keenan contributed to the reporting for this article.
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