Here it is, tax time again! Were you able to save much on your taxes this year? Or, did you fall into one of the many tax brackets where it seems you just can't get a break? Regardless of where your income falls on the scale, there are some things that you can do right now that will potentially reduce your tax bill. While many of these things fall into the tax return you'll eventually file next spring, there are a couple of things you can do to make sure this year's return is at least as accurate as it should be.
1. If you've not already done so, consider having a tax professional do your taxes. Granted, there are lots of free or nearly free options online, but the laws change so much during any given year that you should definitely consider having a reputable firm do your taxes for you. Especially if you make a lot of money, have lots of deductions, or have made a major life change in the past year, the difference between doing them yourself and having another do them could mean a substantial amount of money.
2. Make sure you're filing under the correct status. Even though you might think this is pretty straightforward, there are actually three options for singles and two for married couples. Single, but have a child? Single is probably not the right status for you. Perhaps your spouse passed away, but you have a child? There's a couple of different status options for you, too. Even Married is not necessarily as simple as it sounds. Did you know that you might be able to save money if you and your spouse file separately instead of jointly? Depending on your situation, choosing your status can significantly alter your refund (or tax bill).
Now, what about next year? What can you do differently this year that will save you money?
1. One of the biggest ways to save money on your taxes is to BUY a home. Not only will you save money because you can deduct mortgage interest and property taxes, but you will also be building equity in something that you own. No more paying rent (buying a house for your landlord).
2. Go back to school! Finish your degree, take classes for work, or learn something totally new. Many educational expenses qualify for tax breaks, just be sure to do your research in advance so you'll know if what you sign up for qualifies.
3. Keep paying on your student loans. You can deduct up to $2,500 in interest on your student loan interest every year, even if you don't itemize. So, keep paying on time!
4. Donate to charity. While it's always nice to make a few dollars when we sell old clothes, furniture, and such online or at garage sales, it may be more beneficial to you if you donate it to charity. Just keep the receipts and itemize your deductions (if you qualify).
4. Make pretax contributions to a 401(k), 403(b), or 457 retirement plan. The more you can contribute pre-tax, the more you'll save on your income taxes. For 2020, the maximum 401(k) contribution is $19,500. If you’re age 50 or older, you can make an additional “catch-up” contribution of $6,500, bringing your total 401(k) contribution limit to $26,000. The limits for 403(b) and 457 plans are the same.
Still think you can't save money on your tax bill? Remember, the more attention you pay to your finances throughout the year, the easier it becomes to save money on taxes (and everything else) when the time comes. So, get busy! Pay attention! And have a great year!