Taxes are so much fun…said no one ever. So here are some tax tricks for you to maximize your return.
OK, maybe accountants and tax professionals have said that, but they’re a special breed. The reason why so many people dislike taxes is that they don’t understand them. For example, about 90% of Americans don’t know the different tax brackets.
When you don’t understand income tax brackets and how to lower your taxes, it’s a good reason to dislike taxes.
You can use several tax tricks to lower your tax bill and start to love doing your taxes. But are you ready to learn what they are?
Let’s get started!
1. Interest Payments
If you borrow money to purchase a home or finance your education, you must pay back the principal and interest on those funds. However, you can deduct the interest payments from your taxes, which can result in significant savings.
For student loans, you can deduct up to $2500 in interest. For mortgage interest, you can deduct interest up to $750,000 from the loan’s principal.
2. Credits of Education
Not only can you deduct interest on student loans, but you can also take advantage of the Lifetime Learners Credit, which allows you to get a tax credit up to $2,000, as long as you go to an eligible institution for your education.
3. Standard Deduction
One of the most significant changes to the tax code in a generation happened with the passage of the Tax Cuts and Jobs Act of 2017. This changed the amount taxpayers can take on the standard deduction, doubling it for most taxpayers.
The deduction raise eliminated the need to itemize their returns for taxpayers that usually itemized their returns. That’s because the standard deduction was so high that they came out ahead of itemizing.
You have to do the math yourself and decide if you’ll save more money by taking the standard deduction or if you should itemize.
4. Pass the SALT
Did you make a big purchase over the year, like a car? You probably paid state taxes on that purchase.
Did you know that you can write off those taxes? The SALT deduction stands for state and local taxes, allowing you to deduct up to $10,000 paid in state and local sales, property, and state taxes.
5. Healthcare Deductions
How you pay for healthcare can impact your taxes. For example, if you get your insurance through the Healthcare Exchange, you have to make sure that you reconcile your income with your tax credit received.
You’d owe money if you made more than you predicted when you filled out your application. Or if you made a little less, you may get money back on your return. But then, you’ll get Form 1095-A in the mail, which needs to be filed with your tax return.
6. Retirement Contributions
Some 401(k) and IRA plans allow you to take money from your paycheck and direct it into a retirement savings account. The funds directed are considered pre-tax income, where the capital required is subtracted from your income. So what’s left is what you pay income taxes on.
Since you didn’t pay taxes on the income going into these accounts, you can certainly expect to pay taxes on withdrawing the accounts in retirement.
7. Business Write-Offs
The one area that tends to create the most confusion around taxes is if you have a business. This is because you pay more Medicare and Social Security taxes than employees.
You also have more opportunities to take deductions than employees. Here are a few of the overlooked and misunderstood deductions.
R&D Tax Credit
For innovative businesses, you must do a lot of research and development to get to the top of your industry. But unfortunately, there are many reasons businesses don’t take the R&D tax credit. It’s not just for pharmaceutical or high-tech companies.
RDP Associates has more about the myths that surround R&D tax credits.
One of the good things to come out of the Tax Cuts and Jobs Act of 2017 is the pass-through deduction for businesses.
This allows you to deduct 20% of your business income from your income taxes. Sole proprietors, LLCs, and S-Corporations are eligible for this tax deduction.
Home Office Deduction
If you have a small business or are self-employed, you can qualify for the home office deduction. However, you must use part of your home or apartment exclusively for the company to modify.
You can then deduct the expenses for rent or mortgage payments, utilities, insurance, maintenance, and repairs. You’ll have to remove the percentage of the space used for business from these expenses.
Employees who worked remotely used to be able to claim the home office deduction, but that was removed with the Tax Cuts and Jobs Act.
Employees can’t claim the home office deduction between 2018 and 2025 because employees would have to indicate these expenses on the Schedule A form, whereas self-employed individuals use a Schedule C.
The tax reform bill eliminated the deduction from the Schedule A form, making it impossible for employees to claim it.
The Top Tax Tricks to Lower Your Tax Bill
It’s not accessible to like something that you don’t understand. However, once you learn how taxes work and how to take advantage of deductions and tax credits, you will start to like doing taxes.
Finding tax tricks to lower your tax bill is easy, and you don’t have to be an accountant. But, first, you have to weigh if some of the tax tricks listed here are worth taking or if you’re better off taking the standard deduction.
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