Finding out that you owe a lot of money to the IRS while filing your taxes is never an enjoyable endeavor. This year, let’s get in front of this phenomenon.
Even if you’re armed with the right knowledge, it will still take some work (sorry). However, it’ll all be worth it once you see how much you save. Let’s go over five strategies that will make filing your taxes a much more pleasant experience in 2021!
#1 – Hiring an Accountant
Hiring someone to do your taxes is one of the best ways to make sure your taxes are handled well. A trained professional will always do a better job than you (don’t feel bad, you have plenty of other talents!). Unlike you, a certified public accountant will have years of experience and access to specialized CPA tax software. If you can afford it, there’s no shame in hiring an accountant.
There’s a reason they’re an extremely lucrative and rewarding profession—because they keep professionals and businesses from falling into tax debt!
#2 – Retirement Fund
Contributing to an IRA or 401(k) reduces your taxable income while saving for your retirement. You still get the money (eventually), but you don’t have to pay taxes on it. It’s a great way to reduce how much you owe in taxes if you have enough extra income you can put towards your retirement.
There are limits to how much you can deduct from contributions to your IRA or 401(k) every year. The amount depends on your age, marital status, and modified adjusted gross income. Contribute as much as you can to your retirement account without going over the limit and you’ll be well on your way.
#3 – Tax Credits
There are so many different ways to get tax credits that it can get overwhelming. Here are a few you might not know about:
- Earned income tax credit – This is one of the most overlooked. If you made less than a certain threshold, you could get a dollar-for-dollar reduction on your bill.
- Saver’s credit – You are eligible for this if you are a low-income worker who contributed to their retirement savings.
- Child and Dependent Care Tax Credit – Parents of children in daycare or other childcare services can take advantage of this.
These are only a few of the potential tax credits you could be entitled to. Make sure to go over the complete list if you want to save as much as possible.
#4 – Itemize Deductions
It can be tempting to just claim the standard deduction instead of itemizing (who wants to spend even more time doing taxes?), but the extra effort often pays dividends. There are a few expenses that qualify for itemized deductions, such as:
- Home mortgage interest
- Property taxes
- Medical expenses
- Investment interest
Money can be saved if your deductions total higher than the standard. It can’t hurt to check if itemizing will give you a nice break on your taxes!
#5 – Charity
Giving to charity is a good thing to do in and of itself, but the extra incentive of a tax break is a nice plus (donations still help an organization even if they are given just to get a tax deduction). To that end, all contributions to 501(c)(3) organizations are tax-exempt.
Even physical donations like clothes, food, and household goods can count towards a tax break. Just make sure to get a receipt from the organization you are giving to and you’re all set to save.
Making Taxes Less Taxing
Filing taxes is often perplexing and frustrating in equal measures. Putting tons of work into your taxes to only find out that you actually owe a lot of money can be disheartening. However, if you’re just a bit more diligent, you might discover that your situation is better than you thought. Use these five methods next year and you’ll be well on your way to saving a good chunk of change.