Taxes are so much fun…said no one ever.
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. 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.
There are a number of tax tricks you can use to lower your tax bill and start to love doing your taxes. 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 have to pay back the principal and interest on those funds. You can deduct the interest payments from your taxes, which can result in major savings.
For student loans, you can deduct up to $2500 in interest. For mortgage interest, you can deduct interest up to $750,000 of the principal of the loan.
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 biggest 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 that taxpayers can take on the standard deduction, doubling it for most taxpayers.
For taxpayers that usually itemized their returns, the deduction raise eliminated the need to itemize their returns. That’s because the standard deduction was so high, they came out ahead than itemizing.
You have to do the math yourself and decide if you’re going to save more money taking the standard deduction or if you should itemize.
4. Pass the SALT
Did you make a big purchase over the year, like for 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 taxes, property taxes, and state taxes.
5. Healthcare Deductions
How you pay for healthcare can impact your taxes. If you get your insurance through the Healthcare Exchange, you have to make sure that you reconcile your income with your tax credit received.
If you made more than you predicted when you filled out your application, you’ll owe money. Or if you made a little less, you may get money back on your return. 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 money directed is considered to be pre-tax income, where the money directed is subtracted from your income. 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 the withdrawal of 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. You are responsible for paying a higher share of 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 have to do a lot of research and development to get to the top of your industry. There are a lot of reasons why 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 personal 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. To qualify, you have to use part of your home or apartment exclusively for business.
You can then deduct the expenses for rent or mortgage payments, utilities, insurance, maintenance, and repairs. You’ll have to deduct 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.
It’s not possible for employees to claim the home office deduction between 2018 and 2025 because employees would have to indicate these expenses on the Schedule A form, where 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 easy 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 use to lower your tax bill is easy, and you don’t have to be an accountant to do it. You do have to weigh if some of the tax tricks listed here are worth taking or if you’re better off taking the standard deduction.
Visit this site often for the best content covering everything from technology to personal finance.