Don't Give Uncle Sam More Than he Needs
Millions of Americans will file federal income tax returns this year and, unfortunately, many will be paying out much more of their hard-earned money than necessary. Know that tax laws change constantly leaving professionals and others trying to come up with the best ways to keep taxes down while using legal loopholes that the government does allow. Incomes range extensively and the IRS has limitations and thresh holds on many of the advantageous tax saving strategies allowed. There is nothing wrong about taking advantage of legal measures to reduce your tax bill. Most Americans, however, don't understand the basics of how to minimize the tax burden.
Credits: Tax credits are usually subtracted dollar for dollar from the actual tax liability and may be utilized when filing for 2013. They include the Child Tax Credit, which allows up to $1,000 for children younger than 17; the American Opportunity Credit, featuring up to $2,500 in tax savings per eligible student for tuition costs for four years of post-high-school education; and the Energy-Efficient Home Improvement Tax Credit, which grants 10 % of the cost of certain energy-efficient building materials — up to a $500 lifetime credit to qualifying taxpayers The Child and Dependent Care Credit, for those who pay someone to care for a child younger than 13, or another dependent, offers up to $3,000 for one qualifying individual, or up to $6,000 for two or more qualifying individuals. Make sure to check the IRS website for the latest information regarding claiming tax credits.
Deductions: Like tax credits, deductions have phase-out limits, so you may want to discuss this with a professional. Deductions are subtracted from your income before your taxes are calculated, which may decrease the amount of money on which you are taxed and, by extension, your eventual tax liability. Some examples include contributions given to charitable organizations. And, you may be able to write off out-of-pocket costs spent while doing work for a charity. Others may include amounts set aside for retirement through a qualified retirement plan, such as an Individual Retirement Account; medical expenses exceeding 10 percent of your adjusted gross income are now deductible, expenses exceeding 7.5% are still deductible for those older than age 65; and, possibly, mortgage interest paid on a loan secured for your primary residence. According to H&R Block, more than 500,000 individuals could increase the amount on their tax return if they itemized their deductions versus taking the standard deduction. If you keep accurate records throughout the year, it's a good idea to calculate your taxes both ways, to make sure you are maximizing your deduction amount.
Tax-favored investing: This involves both tax-exempt investments and tax-deferred investments. Tax-exempt investments, which include items such as municipal bonds and certain money market funds, offer a way to make more money that's exempt from federal taxes. Municipal bonds are free of federal income tax and may be free of state and local income taxes for investors who live in the area where the bond was issued. Tax-deferred investments, on which taxes are postponed until you withdraw your money, include qualified retirement plans, such as traditional IRAs and employer-sponsored plans, as well as insurance products such as annuities and, sometimes, life insurance. So, make sure you maximize your retirement plans. If you are an employee take advantage of your company retirement plans to reduce the federal taxable income. If you are self-employed, then you are eligible for similar deductions with less limitations. People that are self-employed can contribute to retirement accounts and can also deduct health insurance premiums.
It is recommended that each January, you should create a set of files, whether a large multi-pocketed accordion file, manila envelopes, or a program on your computer and start to sort and separate the information into one of the following categories:
- Personal Information. Make sure this information includes the legal names of who is filing and who is covered by the return (spouse and dependents). You need Social Security numbers and dates of birth as well. Also, keep your primary bank information – account number and bank routing number, so you can request a direct deposit refund.
- Income. Common forms include W-2s from employers, 1099 forms for other forms of income such as self-employment, investments, and retirement distributions, and K-1s for any partnerships in which you participate. Keep a special folder for security transactions so you can easily determine holding periods from buy and sell dates to ensure that you qualify for capital gains.
- Personal Expenses (Deductions). You will receive forms for IRA and health savings accounts contributions from vendors, and for home mortgage interest deductions, most of the information documenting allowable deductions such as business expenses, entertainment, or travel must be taken from other financial documents such as check registers, cancelled checks, bank statements, and credit card statements. Print out summaries of the 2013's transactions for each credit card, and review each transaction to determine whether it can be deductible.
- Business Information. If you own a small business, perform freelancing jobs, or have other side income, you need to keep the business income and expense items separate from your personal information. There are some expenses that are deductible for a business, but not a personal filer.
Start thinking about what you need to do to be able to ask the right questions and know where to find the answers. Educate yourself, plan accordingly, and you will be able to save more money now and for in the future.
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Lang Premier Properties are Birmingham Realtors specializing in Oakland County Real Estate. Stephanie is an agent with Max Broock in Birmingham, Michigan. See what past clients have to say about Stephanie Lang. Lang Premier Properties looks out for your best interests when you purchase a new custom luxury home. We always recommend working with an experienced luxury real estate agent when buying a new luxury estate.