Get the scoop on claiming tax deductions, plus 4 strategies to reduce your taxes and save money.Get the Money Girl book at http://MoneyGirlBook.com
Money Girl
347 MG How to Pay Less in Taxes (Part 2)
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And to get more money tips and advice that are not mentioned in the podcast, be sure to sign up for the free Money Girl newsletter at quickanddirtytips.com. While you're there, be sure to connect with me on social media or read a transcript of this show, which is episode number 347, "How to Pay Less in Taxes Part 2." In part one of this series, I covered tax credits and reviewed five common ones that you might qualify for. Today, we'll cover how tax deductions work and who can use them. Plus, you'll learn four additional strategies to reduce your taxes and save more money. A tax deduction is an amount you can subtract from your taxable income, which reduces the amount of tax you have to pay. For example, if your taxable income is $40,000 and you're eligible to claim $5,000 in deductions, then you're only taxed on $35,000. There are loads of tax deductible expenses, such as charitable donations, medical expenses, mortgage interest, property taxes, and student loan interest. Some tax deductions require you to itemize your tax return and some don't. So let's make sure you understand how to itemize. When you file your tax return, you can choose between listing out specific deductions on a form called Schedule A, or claiming the standard deduction for your tax filing status. You should always choose the method that gives you the largest deduction and saves you the most money. If you add up all your allowable deductions and they total more than the standard deduction, be sure to itemize. However, you must keep records, such as receipts and invoices to substantiate your itemized deductions. Unfortunately, many Americans are too lazy to do this and end up overpaying taxes every year. Don't be one of them. The best way to make sure that you never miss an itemized deduction is to review Schedule A of Form 1040. I'll have a link to this form in the show transcript. You'll see the entire list that you can claim for the tax year. There's also an instruction sheet for Schedule A, which gives you details about each of the deductions. Now, I mentioned that some deductions don't require you to itemize on Schedule A. These are called adjustments to income because they adjust or reduce your gross taxable income directly on the main tax form. Here are some examples of adjustment deductions, contributions to a health savings account, moving expenses, self-employed health insurance, contributions to retirement plans, student loan interest, and alimony payments. This isn't a complete list, but claiming these types of deductions means that you don't have to complete Schedule A. However, some of them do require you to fill out another IRS form or worksheet. Again, don't let paperwork keep you from saving money, taking the time each year to maintain records and complete forms will help you cut your tax bill and really pay off. In addition to using tax credits and deductions to pay less in taxes, here are four additional tips to keep more of your hard-earned money. Tax Tip #1. Adjust your withholding. If you look forward to celebrating a big tax refund each year, it may actually be hurting your finances. If you consider this, when you file a tax return, you're really just settling up with the government. If you didn't pay enough during the previous year through payroll deductions or quarterly estimated payments or quarterly estimated payments of your self-employed, then you have to pay the difference on tax day. But if you overpay during the previous year, then you get a tax refund for the excess. So, a tax refund is simply an indication that you hand it over way too much money to the government every single month during the year. I don't know about you, but I'd rather use my own money instead of giving it to Uncle Sam as an interest-free loan. You should have kept that money instead and put it to work earning a nice return in a savings or retirement account. By receiving a higher paycheck, instead of waiting over a year to get a tax refund, you have more control over your money every month. To review your payroll tax withholding and potentially increase your net pay, complete Form W4. You can submit it to your employer at any time during the year. If you need help, ask your employer or use the withholding calculator at irs.gov, and I'll include a link to that in the show notes. Tax Tip #2. Contribute to a retirement account. You know that you should be saving for retirement. Plus, the fact that retirement contributions lower your tax bill is an added bonus. No matter if you use a retirement plan at work, an account for the self-employed, or a traditional IRA, the money you put in is never taxed until you make withdrawals in the future. Tax Tip #3. Interview to a health spending account. Health spending accounts allow you to pay for certain medical expenses with tax-free money. Two of the most popular are flexible spending accounts and health savings accounts. A flexible spending account, or FSA, can be sent up by an employer for workers who elect to set aside a portion of their earnings to pay for qualified medical expenses on a pre-tax basis. These accounts have a "use it or lose it" rule because you typically forfeit funds not spent by the end of the plan year. On the other hand, a health savings account, or HSA, can be used by anyone who has a qualifying high deductible health plan, even if you're self-employed, unemployed, or retired. Your contributions aren't taxed as long as you spend them on qualified medical expenses. Plus, they roll over and accumulate year to year if you don't spend them. If you're eligible for either one of these tax-advantaged accounts, be sure to take advantage of the opportunity to spend pre-tax money. For complete information, take a look at IRS Publication 969. And tax tip number four, hire a professional. In many cases, spending a little money on a tax professional is the best way to save. Their job is to stay up-to-date on tax laws that are always changing. So, he or she may find additional tax credits or deductions, help you stay organized, and strategize on whether you should speed up or postpone certain expenses. And one final quick and dirty tip is that the IRS ends up with millions of dollars that it tries to refund taxpayers each year but can't reach them. If you moved last year, complete Form 8822 to change your address and make sure that your money follows you to your new home. From tax credits to health spending accounts, there are many ways to reduce your taxes. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then Ixcel is a right for your family. 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