The United States has a tax compliance rate of about 84%. This is a measurement of how many individuals and businesses comply with the tax code.
It’s getting more and more difficult to comply because the tax code is so complicated. It’s also intimidating because you don’t want to get threatening letters from tax agencies.
You can take the intimidation out of filing taxes by knowing a few tax tips to minimize your tax liability and maximize your refund.
Do you want to relieve yourself from the stress of managing taxes and figuring out your tax return? Read on to get the top tax and financial management tips.
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1. Maintain Excellent Records
Money management starts with good recordkeeping. You need to maintain documents to prove you’re qualified to take certain deductions and tax credits.
This includes income statements, such as W-2 or 1099 forms. If you’re claiming expenses, you’ll need to provide invoices and receipts.
Submitting a bank statement that shows the payment isn’t sufficient. You need to provide additional documentation.
How long should you hang onto these records? It’s recommended to maintain records for three years for individual filers.
For businesses and self-employed people, maintain your records for seven years.
2. Remember Your Deductions
There are countless tax deductions that can help you lower your tax bill. Businesses and self-employed people can deduct business expenses from their income.
If you work from home, you can deduct expenses related to the home from your returns. This only applies to self-employed. It no longer applies to employees who work from home.
There are still deductions you can apply, such as mortgage interest and property taxes. You can deduct charitable expenses up to $300 this year.
If you’re among those still paying off student loans, you can take a deduction on interest paid, up to $2,500.
Health care and medical expenses may get deducted in certain circumstances. For instance, if your medical bills were more than 7.5% of your income, you can deduct the expenses on an itemized tax return.
3. Use Bookkeeping Software
Whether you’re an individual or a business, you can benefit from bookkeeping software. This lets you see where your money goes each month. It also ensures you stay on budget.
The real advantage of having software is that you categorize your transactions in advance. Use a service like UltimateTax to manage your taxes and everything that goes into making sure you are well organized.
You’ll save hours on your tax return because you can pull up reports that calculate expenses per category. You don’t have to go through the painful task of going through bank statements and entering transactions on a spreadsheet.
Software reduces the chance of costly errors. Even if it was an honest mistake, the IRS can still assess interest and penalties on underpayments.
You’ll have to file a tax return amendment which adds to your costs of filing a tax return.
4. Take Tax Credits
This is one of the key tax terms to know.
Tax credits are different than deductions. They do more to reduce your tax bill because they have a dollar for dollar reduction on your tax bill.
Here’s how they work. Let’s say that you earned $45,000 this year. You owe 15% or $6,750 in taxes.
Tax credits are a vital aspect of tax management. Unlike deductions that reduce taxable income, credits directly lower your tax bill, offering a dollar-for-dollar reduction. For example, a $1,000 tax credit means you owe $1,000 less in taxes. This can significantly impact your final tax liability. Moreover, for businesses in Arizona, understanding the specifics of Arizona sales tax is crucial. With both state and local sales taxes potentially applying, it’s essential to accurately determine the right rate for each transaction. Failure to do so can lead to legal troubles and financial penalties, emphasising the need for compliance with Arizona’s sales tax regulations.
A deduction will reduce your taxable income. A $5,000 deduction will lower your taxable income to $40,000. Assuming you stay in the same tax bracket, you’ll owe $6,000. If you’re unsure of where you stand, you should be able to find your 2022 tax bracket pretty easily.
A tax credit directly impacts the amount of tax you owe. Using the example above, if the $5,000 deduction was a tax credit, you’d subtract that from the $6,750 tax bill.
You’d only owe $1,750.
That’s why you want to take as many tax credits as you can. The Child Tax Credit and Earned Income Credit are among the most well-known.
You can get tax credits for installing solar panels, going to school, or adopting a child.
5. Make Retirement Contributions
There are elderly Americans who have to work because they didn’t have adequate retirement savings. You certainly don’t want to work when you’re 75 because you have to.
Fortunately, the tax code provides incentives to save for retirement. Contributions to a 401(k) or traditional IRA plan are tax-deductible.
The maximum deduction is $6,000 for a traditional IRA, and $20,500 for 401(k) plans in 2022.
6. Handle Back Taxes and IRS Requests
There are times when you fall behind on your taxes. You might be one of the millions of new entrepreneurs that started a new business this year.
Your tax liabilities are much different because you have self-employment taxes as well as income taxes to pay for.
You might have sold a property and realized unexpected capital gains that get taxed.
Whatever the reason is for falling behind on your taxes, you can’t hide from the IRS. You need to handle the situation as soon as you can.
There are ways to handle back taxes, such as going on an installment plan. If you want to know how to reduce back taxes, consider an offer in compromise.
7. Put Your Tax Refund to Work
Financial management and planning are essential if you want to hit your financial goals. You can’t depend on the lottery or inheritance coming through.
Americans usually have a plan for spending their refunds. What they spend it on doesn’t serve them in the long term.
Make a plan to put your money to work. Take a percentage and put it into a rainy-day fund. Deposit the funds right into a retirement account and get ahead on your taxes for next year.
Essential Tax Tips to Maximize Savings
Taxes aren’t easy to understand. These tax tips will help you make sense of the tax code and save time and money on future tax returns.
Now that you know how to save time and money on taxes, check out the blog for more financial trends that can help you plan for next year.
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