When filing your taxes as tax season comes around, the last thing anyone wants to see is the unexpected surprise of a large tax bill. Yet, keep in mind that taxes for 2020 may increase. This is because of the temporary pause on withholding payroll taxes through President Trump’s executive order.
If you really want to save a lot of money, some of these items may have to be itemized instead of doing the standard deduction. But doing it this way might be worth the extra effort
To avoid getting this type of surprise next year, here are some ways you can reduce your tax burden and end up paying less in taxes.
Contribute to A 401(K) or IRA Account
Contributing to a 401(K) or IRA account is a great way to reduce your tax bill during the year since the IRS does not divert what you take directly out of your paycheck into these types of accounts.
A 401(K) is typically sponsored by your employer, though anyone who is self-employed is allowed to open an account on their own. For the 2020 year, you can put $19,500 into your 401(K). But, if you are age 50 or older, you can contribute an extra $6,500.
IRAs come in two types: traditional and Roth IRAs.
For a traditional IRA, you can deduct any contributions, but how much you can deduct will depend on how much you make and whether you or your spouse is covered by a retirement plan at work. Also, keep in mind there is a $6,000 contribution limit per year. With both types of IRAs, you do not have to pay income taxes on the returns until you withdraw money during your retirement.
Through 401(K), Roth IRA, and Traditional IRAs, these will help your money grow tax-free until you eventually retire.
See If You Are Eligible for an Earned Income Tax Credit
Rules surrounding the Earned Income Tax Credit can be confusing. If you earn less than $57,000 per year, you may be eligible. Plus, you could qualify for a tax credit of up to $7,000 depending on income, marital status, and how many children you have.
This is important because a tax credit can reduce your tax bill to zero. Depending on the credit, you may get money back from the IRS as part of your refund. For example, if you are working while getting a college or graduate school-level degree, the American Opportunity or Lifetime Learning Credits are a great option to list on your tax return.
This is different than tax credits that allow you to reinvest money into your self-employed or side business through capital allowances by buying property, machinery, and research & development.
Sell Any Stocks Weighing Down Your Portfolio
If you know you might get a tax deduction, getting rid of stocks that don’t work for your financial portfolio may be worth it. You are able to deduct any losses on stock sales that can cancel out any taxable capital gains you might have made during the year. There is a $3,000 limit or $1,500 for married couples filing separately.
A quick note: tax avoidance should not be a substitute for wise investing. You should only sell a stock if it truly does not work for your portfolio anymore. This is important because the IRS can take back your deduction if you buy back the stock within 30 days.
Relieve Your Tax Burden
There are many things to keep in mind when trying to figure out how to lower your tax burden. If you have your important tax documentation in front of you and know which deductions and tax credits you are eligible for, then you will be able to save money on your taxes and get a larger tax refund. Make sure to consult a tax professional about filing taxes. If you want to learn more about other ways to improve your finances, check out our site and read more of our articles.