Current federal Income tax brackets range from 10% to 37%, but if you are smart about claiming deductions and credits, you can get away with paying less in taxes.
“There are more opportunities for self-employed workers and business owners in general,” says Luke Sotir, a financial professional with equitable advisors in the greater Boston area.
However, there are still many ways to reduce the tax liability of taxpayers.
Tax Credit and Deductions Changes happen regularly though, and the Tax Cuts and Jobs Act of 2017 limited some popular cuts and others.
“Of course, it’s a moving target,” says David Snyder, founder and CEO of Harness Wealth, New York City.
As of now, here are 15 ways to reduce how much you owe for the 2020 tax year:
Contribute to a retirement account
Retirement account contributions are an apex tax-reduction tool, as they serve two purposes.
Contributions to traditional 401 (k) and IRA accounts can be deducted from your taxable income and, consequently, reduce the amount of federal tax you owe. These funds also become tax-free till retirement. If you start early, saving money in these accounts can secure your retirement.
“Even if you don’t have that plan executed by the end of the year, you still have time,” says John Mesowski, managing director of the accounting firm CBIZ MHM in Tampa Bay, Florida.
While workplace 401 (k) accounts are required to contribute by the end of the calendar year, tax-deductible contributions can be made until the April 15 tax-filing deadline for traditional IRAs.
Open a health savings account
If you have a qualified high-deductible medical plan, contribute to a health savings account. Contributions to these accounts offer an immediate tax deduction, are tax-deferred and may be tax-free for qualified medical expenses. Similar to assets in a retirement account, any balance left at the end of the year can be rolled indefinitely.
Use your side hustle to claim a trade deduction
Self-employed persons (full-time or part-time) are eligible Tax deduction score. This means that as a ride-share driver your freelance projects or side gigs can give you considerable tax savings.
Some of the available business deductions include mileage, shipping, advertising, website fees, percentage of home Internet fees used for business, professional publications, dues, subscriptions, business-related travel, office supplies and Any expenses for running are included. Your Business. Those premiums may also be deductible if you pay for your own health, dental or long-term care insurance.
Robin E. According to Caruso, CPA and partner at accounting firm Pregar Metis in Cranbury, New Jersey, be sure to maintain proper records. He has noticed that many people have lost their deductions for that reason.
“They stopped because the taxpayers did not keep the correct documents,” she says. Be sure to keep receipts, mileage logs or other records that you can generate in the event of an audit.
Claim a home office deduction
To qualify for the deduction, the space must be used regularly and exclusively for commercial purposes. For example, if an extra bedroom is used exclusively as a home office and makes up one-fifth of your apartment’s living space, you can deduct one-fifth the rent and utility fees.
Write business travel expenses even while on vacation
Combine a vacation with a business trip, and you can reduce the cost of the vacation by subtracting the percentage of the time spent for business purposes. This may include airfare and part of your hotel bill, in proportion to the time spent on business activities. Talk to a tax professional about how to do this calculation correctly.
Half of your self-employment tax
The government assesses the federal Insurance Contribution Act tax of 15.3% on all income to pay for Social Security and Medicare programs.
While employers divide costs with their workers, self-employed individuals are responsible for paying the full amount themselves. To compensate for the extra expenditure, the government will allow you to deduct 50% of the amount paid from your income tax. You are not required to claim this tax deduction.
Get a credit for higher education
Since it is a credit, that amount is deducted from the tax paid by the government. If it exceeds the amount of taxes you pay, you may get a refund of up to $ 1,000.
Meanwhile, lifelong learning is great credit for adults promoting education and training. This credit is up to $ 2,000 per year and helps pay for college and educational expenses that improve your job skills.
See if you qualify for an earned income tax credit
Even if you are not required to pay federal income tax, you can still get a refund from the government. Earned income tax is a refundable tax credit of up to $ 6,660 for the year 2020.
The EITC is calculated with a formula that takes into account income and family size. There is no income limit for the credit limit from $ 15,820 for single taxpayers, to $ 56,844 for married couples having three or more children jointly.
State sales tax item
Taxpayers who itemize their deductions can include either their state income tax or state sales tax in their Schedule A form. If you live in a state with no income tax then state sales tax breaks are a great option.
Although taxpayers can easily claim their sales tax deduction using a table provided by the IRS, Mesowski says that people should remember to add to the sales tax from any major purchase, such as a car or boat.
The federal tax deduction for state and local taxes is capped at $ 10,000 from all sources.
Deduct private mortgage insurance premium
If you have less than 20% equity in your home, chances are you will pay private mortgage insurance. This coverage is necessary for the protection of lenders in the event they stop making payments.
As of 2017, taxpayers can deduct the cost of private mortgage insurance on their itemized deductions.
While the deduction was abolished in the Tax Cuts and Jobs Act, it was reinstated at the end of 2019 and is available for the 2020 tax year. It was also made retrospectively for 2018. This means that you can amend your 2018 tax return to claim it, but Caruso recommends checking if it will result in any significant refunds.
“Whenever you open an old retreat, you put yourself at some risk of being watched closely by the IRS,” she says.
Make charitable donations
Charitable contributions made with payroll deductions, checks, cash and donations of goods and clothing are all deductible. These deductions are compounded and often overlooked.
“People can forget about their non-cash contributions,” Meskowski says.
You usually need to itemize to claim the deduction, and the standard deduction has almost doubled since the 2017 tax reform, many people Do not select item. However, the Coronavirus Assistance, Relief and Economic Security Act, or CARES Act, allows taxpayers who do not deduct cash donations of up to $ 300 made before December 31, 2020.
Adjust your basis for capital gains tax
Investor: When calculating the cost basis after selling a financial asset, be sure to add all of the reinvested dividends. This increases the cost base and reduces your capital gains when selling investments.
If you sell your home, you can also pay capital gains tax, especially if the value of your property has increased significantly.
However, there is little you can do if you have renovated or improved the house.
“Any investment you make can be deducted from capital gains,” Snyder says.
Avoid capital gains tax by donating shares
Another way to avoid capital gains is to use shares to make charitable gifts.
“You can transfer shares that had large gains directly to donor-advised funds,” Snyder says.
Money transferred to donor-advised funds is not only exempt from capital gains tax, but items that do can also be deducted. According to Snyder, donor-aided funds can be started with less than $ 5,000.
Claim deduction for military members
Are you in a military reserve like the National Reserve?
If you travel more than 100 miles from home and need to stay away overnight, you can cut down on untrained travel expenses like transportation, food and lodging.
If you are an active duty service member, you can deduct any costs associated with going for a permanent change of station.
Do not forget the state and local tax breaks
State and local taxes can add up, so don’t forget to look at ways to reduce your tax burden.
Although federal tax reform legislation eliminated miscellaneous deductions, many states still allow them, Caruso says. Or they may have lower limits to claim.
For example, in New Jersey, taxpayers may deduct medical expenses in excess of 2% of their adjusted gross income. On federal tax forms, only medical expenses are deducted above 7.5% of a person’s income.
Tax savings are not limited to income taxes only. In New York City, there is a parking tax for some rented places, but Snyder says residents can effectively waive nearly half the fee by requesting a waiver.
Regardless of where you live, check with your local and state tax authorities to see if the deduction may be available to you.