Tax season is here again. Everyone would love to avoid paying a hefty amount of money in taxes, don’t you? But how?
Here are some helpful tips:
1. Take Advantage of Tax Credits
Tax credits can increase a refund or reduce a tax bill. Usually, credits can only lower a tax liability to zero. But some credits, such as Earned Income Tax Credit (EITC), child tax credit, Recovery Rebate Credit and first-time homebuyer credit, are refundable. Therefore, they can make the difference between a balance due and a refund.
Although some credits are available to people at all income levels, others have income restrictions. These include the EITC, Recovery Rebate Credit, saver’s credit, first-time homebuyer credit, education credits and child tax credit.
Generally, if you qualify for a credit, you can claim it whether or not you itemize you deductions.
2. Donate to charity
Charitable donations are usually 100% deductible. However, in order for your donation to be tax deductible, it should meet these requirements:
Must be made to qualified organizations
Should be part of your itemized deductions on Form 1040, Schedule A
It is advisable to keep a record of your contribution of cash, check, or other monetary gifts, either a bank record or a written communication from the charitable organization, which includes the date and amount of the contribution as well as the name of the organization for documentation purposes. Click here for more information.
3. Contribute to your IRA and other retirement plans.
Contributing to your Traditional IRA account can reduce your taxable income, as it is tax deductible. However, you have to meet the contribution deadline in order to qualify, which is usually April 15.
Please note that you can only take a full deduction if neither you nor your spouse was covered for any part of the year by an employer retirement plan.
These are the dollar limits for IRA contributions for tax years 2009 and 2010:
$5,000 ($6,000 if you are age 50 or older), or
100% of your compensation.
Take note that this limit may be increased to $8,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year.
If you have an employer-sponsored retirement fund, make your contribution to save money on your income taxes. Doing this will lower your income tax as your employer will already deduct your contribution from your gross pay, therefore the basis for your income tax will be lower.
4. Include Medical Expenses
Itemizing your deduction on Form 1040, Schedule A, may allow you to deduct your medical and dental expenses. This includes expenses you paid for medical and dental care for yourself, your spouse, and your dependents.
Medical expenses include insurance premiums paid for accident and health or qualified long-term care insurance. However, you may not deduct insurance premiums paid by an employer–sponsored health insurance plan unless the premiums are included in Box 1 of your Form W-2.
Please note that you can deduct only the amount of your medical and dental expenses that is more than 7.5% of your adjusted gross income.
5. File Your Tax Returns on Time
Don’t forget, April 15 is the tax deadline for Individual Tax Returns. Be sure to send in your tax returns by then to avoid any penalties. If you think you won’t be able to meet this deadline, it is important to file for an extension. However, keep in mind that extensions are granted depending on your situation. It will be wise to consult your accountant or call the Internal Revenue Service for more information.
Please note that these are only for informational purposes. Please be sure to consult your tax advisor or financial planner for help and advise when preparing your tax returns.
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