There are two things that are inevitable to human existence, which are debt and taxes. When most people receive their tax, they don’t know how to save more money for themselves.
I know you must have been confused by the revelation made by my last statement… thinking;🤔 “but how possible is this though”?
Yeah, it’s true and real for a fact that you can save more money legally for yourself instead of giving it to the government through tax. Come along with me to find out
Note: This article is a long and detailed one, you may have to bookmark it.
With continuous growing financial challenges along our path, we ought to develop creative models for handling our finances effectively that will help us save more of our money. These tax tips will help you know how to save more of your money when paying tax. These are
1.Claim your home office deduction
Many small business owners due to ignorance unfortunately miss out on home office deduction. Research reveals that in the tax year 2011, only 32%(7.6 million fliers) of eligible filers claimed a home office deduction. This is far less than the 52% of small businesses that operate from home.
This is the most commonly missed expense that can save you lots of money on your tax return. Most persons miss out on home deductions because they are quite not sure of what qualifies as a “home office.”
Homeowners and renters are allowed by the IRS to claim a home office deduction; so even if your space is leased, you may claim it on your tax return(money).
All types of homes are included in home office deduction, from a houseboat to a studio apartment (but not a hotel or an Airbnb that you’re staying in on vacation).
This is partly because most persons aren’t clear of what qualifies as a “home office.” Your space must meet two requirements before you can claim home office deduction. These includes
- Exclusive and regular use: Your office space must be used specifically for business purposes. For example, if you make use of a guest bedroom in your home as both your office and a place for your guest to stay, that room is ineligible for home office deduction.
- Primary business place: Your home office must be your primary business place (this means that you don’t have another office elsewhere). The primary function done in the office space must be managerial and administrative. Management activities include billing of customers, making sales calls, bookkeeping, and appointment booking.
Make sure you’re always proactive at taking leverage of home office deduction. You get the advantage of saving a lot of money on your tax return!
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2. Reduce taxable income by deferring income
Always note that your income tax is charged based on the money/amount of income that you earn the previous year. The higher your income, the higher your tax. If you want to lower your tax burden then defer some income until the next calendar year
Depending on the accounting methods that your business uses, there are two ways to defer income. I’m sure that you’ll love to know. Read more to find out;
- Cash-basis accounting: Extend the due date on the invoice until the new year or delay sending invoices. Income tax rates depend on when you actually receive payment, not on the date that you send out the invoice.
- Accrual-basis accounting: It’s best that you delay until the next calendar year if your business doesn’t include charge until after you’ve fulfilled the delivery of goods and services. Under accrued accounting you must note that there are strict guidelines that apply to record deferred income; confirm from your controller services if you’re supposed to make this move.
3. Be proactive about procurement and depreciation
Like it or not, equipment is one of the major expenses in a small business budget. Writing off new purchases and offloading old equipment can greatly help your tax burden.
Make sure that you purchase the equipment that is required, whether laptop, car, administrative furniture, and others that’s required for official use before the end of the year. These can help significantly with the tax burden.
The earlier date of purchase can be declared as a higher expense, or a full purchase price since the item will have had less time to depreciate.
Get informed through the IRS list of business tax credits to see what part of the list that your business can leverage upon by claiming it. These may include business credits such as energy-saving upgrades, solar panels, etc.
To maximize the amount of your money that you will be able to save from tax, you should also review depreciation rules. The steps below will make you achieve that;
- You have to first, declare the entire expense of the previous year. In this case, 2019 as the previous year.
- Use a shorter depreciation timeline.
- Use an accelerated depreciation method.
- “Decrease the residual value to allow a greater annual depreciation expense.”
4. Make sure your retirement plan receives maximum contribution
This isn’t only a good investment for your future, but it’s also good for your tax rate.
This means you’re paying less to the government each month and more to yourself. But the downside to this is you can’t access the funds until you’re probably in your 60s. But this fund grows annually based on the compound interest effect.
Most individuals don’t know that they have the right to contribute up to $19,000 to a 401(k) in 2019. You may contribute up to $6,000 if your account is set up like an IRA.
Small business owners especially can take advantage of claiming the cost of setting up and administering each 401(k) plan, up to $500 annually for each of the first three years that the plan exists.
NOTE: But let me shock you a bit with a newer revelation. For a good investment that will yield well in the marketplace, please it’s best to have good financial education that will see you invest in creative markets. Real Estate is one of the ever-growing markets to consider.
5. Pay down your debt
Most small/growing business owners take on debt financing to improve on their brand. In most cases, a loan isn’t taxed as an income, but you may be taxed on interest payments.
Depending on your business legal structure and the type of loan, you’ll be able to deduct your interest payments and lower your tax burden.
Make sure you clear off all uncollectible debts you may have accumulated through the year.
Uncollectible (bad debts) are those which are owed to your business by a customer that you (the business owner) or a creditor has not been able to collect.
IRS permits will enable you to write off bad debts before the year. Go through your accounts’ report to see who hasn’t paid. If the results show a customer who is no longer active, then you should strike this person’s balance from your total sales figure to reduce your income, which in turn lowers your income tax.
However, if you do write off bad debt and the person pays you later, you must reverse the write-off.
In 2018, the IRS issued more than 111.8 million refunds, with taxpayers receiving an average payment of $2,869.
With things done well, this year could even bring greater returns. Here are tips that can save you a lot:
1. Boost retirement contributions
This has already been highlighted above. When you contribute more to your retirement financial plan, you directly reduce your taxable income and at the same time save more for retirement.
For the self-employed, there’s the provision for you to contribute to a Simplified Employee Pension account (SEP IRA). It has a limit of about 25% and must be before April 15th.
2. Fund a health savings account
Contributing to a health savings account (HSA) is another good way to reduce your taxable income. You need to have a high deductible health plan to accomplish this. This must be done before the usual April 15th deadline.
This can help you reduce your income for taxation, and also helps you have a proper plan for your future medical cost.
- An individual who is single can contribute up to $3,500
- For couples and families, the payment limit goes to $7,000
- You can add an extra $1,000 if you’re 55 or older.
Health savings account (HSA) are also great to grow to your financial advantage because it has triple tax advantages because; the contributions go in pretax, you can withdraw it tax-free for qualified medical expenses and any money you don’t use can be invested, and, as with an IRA or 401(k) plan, the gains are tax-deferred.
3. Collect tax credits
Tax credits are of great value because they reduce your tax money(bill) on a dollar-for-dollar basis.
For instance, families can deduct up to $3,000 from their federal income taxes for each qualifying child under 17. If you qualify, that $3,000 child tax credit will save you $3,000 in taxes.
Parents who use a childcare(or daycare) service may also be eligible for the federal Child and Dependent Care Tax Credit (CDCTC) of up to $3,000 for one child or up to $6,000 for two or more.
To gain access to the dependent care tax credit, reach out to your childcare provider for a tally of the costs you paid, as well as the provider’s tax ID.
For low or modest income taxpayers, the earned income tax credit for a family with children can be as much as $6,557 or up to $529 for taxpayers who do not have a qualifying child as long as they meet certain income limits and other requirements.
The IRS estimates show that 4 out of 5 eligible taxpayers claim and get the EITC. Lots of persons also miss out on this.
4. Dig for deductions
The Tax Cuts and Jobs Act set new higher standards that must be met to qualify on who will itemize, as you now must surpass the 2019 standard deduction of $12,200 for singles or $24,400 for married filing jointly.
You can leverage on health tax breaks such as if you were ill or had major surgery to reduce your taxable income.
For medical expenses that were greater than 7.5% of your adjusted gross income of the previous year. For instance, if you made up yo $30,000, you can deduct medical expenses if they were greater than $2,250.
You can claim a charitable deduction when you donate to a good cause.
There is a new deduction for entrepreneurs. A qualified business income (QBI) deduction allows for owners of “pass-through” entities such as S-corporations and partnerships, to deduct up to 20% of their qualified business income.
Categories that can benefit include business owners who are single with taxable income below $160,700 and who are married with a taxable income of $321,400.
You need to also learn how to best save your money/asset for your children using Trust funds.
- Read: Trust Funds: How to Leverage it to Protect Your Family Assets & Safeguard Your Children [+ Risks Involved If Mismanaged].
5. Check your withholding
For this purpose, the Treasury Department and the IRS have updated the withholding tables to reflect the new standard deduction of the tax law, which also includes the limits on certain itemized deductions and personal eliminated exemptions.
This resulted in some filers ending up with smaller-than-expected tax refunds in 2018. Others ended up owing money.
NOTE: You’ll get a large refund the following year if you withhold for far too much, but you’ve also given the government an interest-free loan. You’ll take home more cash in your paycheck if you withhold too little but you may owe the IRS come April
Taxpayers, however, love a refund. This has been proven by several surveys.
If that’s👆 the case for you, then you may need to increase the amount of taxes withheld from your paycheck. Or you can file a new Form W-4 with your employer to reduce the amount you want to have withheld on tax and have more money in your pocket every week.
If you have gone through this process with me, you’ll have lots of options on your fingertips to take advantage of. Thank me later when you’ve seen the benefits this brings to your life.
Question: Discuss any part of the topic that you find intriguing or need more guidance on?
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I’m the cofounder of WealthOnPoint. Business has always been where my interest lies. If you have any business, finance or investment related issue, feel free to contact WealthOnPoint via email [email protected]
Our team is more than happy to help you out.