Few people enjoy filing their tax returns. For this reason, people tend to go through the process hastily, often missing key tax deductions, credits or filing strategies that could save them a great deal of money. Below are some tips taxpayers can use to save money at tax time.
1. Keep thorough records. Many taxpayers choose to take the standard deduction simply because it's easier. However, in many cases, itemizing your deductions is much more beneficial. However, you can't itemize your deductions without accurate, comprehensive financial records. Throughout the year, file receipts from non-reimbursed medical expenses, job search costs, donations to charity and major purchases.
2. Make some green upgrades. The Internal Revenue Service offers a variety of tax credits to taxpayers who install energy efficient, eco-friendly equipment in their homes. Examples of equipment that may qualify you for a tax credit include solar water heaters or a solar electric system. You may also be able to claim a tax credit for the purchase of an electric automobile.
3. Save for retirement. Contributions you make to retirement plans, such as traditional IRAs and employer-sponsored 401(k)s, are tax-deductible. If you open a Roth IRA, your contributions will be taxed, but the money you put away will grow tax-free. If you don't already have a retirement plan, consider opening one this year. If you do have one, consider increasing your contributions to the maximum allowed.
4. Donate to charity. If you have extra items lying around the house, consider donating them to charity. Items worthy of donation include furniture, books, electronics, old toys and clothes. If you choose to make donations, keep an accurate list of everything you donate during the year. All donations worth more than $250 must be documented with a receipt. Keep in mind that there may be limits to the amount you donate.
5. Optimize your withholdings. Some taxpayers choose to have more money withheld from their income than they need to in order to receive a larger tax refund check. However, this is not a wise practice in most cases. When you qualify for a tax refund, you are essentially receiving money that belonged to you all along.
Instead of allowing the government to borrow from you interest-free, reduce your withholdings and invest the extra money in a CD or retirement account. Alternatively, you can also use the extra cash to pay down debts with high interest rates.
The tax system can be confusing. However, using these tips, you can save a lot of money on your taxes. To save even more, make sure that you consider any deduction you may qualify to claim. Examples of overlooked deductions include self-employed tax deductions, tax preparation fee deductions, job relocation expenses and the childcare tax credit. If your tax situation is complicated, or if you will be claiming a lot of complex deductions, consider hiring a tax preparation professional to help you complete the required paperwork and identify money-saving opportunities.
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