How to Reduce Taxable Income
Reducing taxable income does not have to wait until tax time. Most tax deductions can be applied, regardless of age and tax bracket.
Read below to learn how to reduce taxable income in several tax brackets.
Reducing taxable income for young taxpayers
Somethings a young taxpayer should think about is saving for their first home, marriage, and expenses for job transition.
These things can be saved for by using a Roth 401(k) account. A regular 401(k) offers tax breaks when money goes in, but can be taxed when it comes out at retirement age. Roth 401(k) is different completely. It does not offer a tax break when the money goes in so that it will be tax-free when the money is taken out.
Once the Roth IRA has been in place for five years, a percentage of the yearly earnings may be withdrawn and used to purchase a new home.
Another overlooked tip for young taxpayers is, the cost of finding a new job. Keep in mind this does not apply to a taxpayer’s first job. When you are between jobs and looking for another source of income within the same field costs are deductible. You can save gas, food, and lodging expenses that are acquired while searching for a new job. These costs are considered miscellaneous expenses and if they add up to 2% of your annual income, they are tax deductions.
When you find a new job, be mindful of how far it is from your home compared to the old job. If you live more than 50 miles from your new job and the company does not provide a vehicle, then mileage and parking expenses are deductible. Moving costs are also deductible if the new job is more than 50 miles away; if it is the same line of work.
Recent changes have made it where the beneficiary of a 401(k) can now roll those funds into their Roth IRA account. Qualifying taxpayers must be named beneficiary before the 401(k) goes into the primary owner’s estate. The money will then adhere to the Roth IRA withdrawal guidelines.
Non-taxable income for single taxpayers
Single taxpayers can also take advantage of tax breaks through Roth IRAs, job hunting expenses, moving costs acquired by changing jobs, and savings for buying a new home. However, there are a few tax deductions specifically designed for single people.
If your employer offers a flex plan, be sure to participate. The plan allows you to withhold a portion of your earnings that can be used later for medical expenses. These accounts help save on Social Security tax because none is taken out of the flex plan. Another way it saves is, by reducing your taxable income.
Some employers offer options to invest in restricted stocks. If this is a benefit provided to you, think about enrolling in the 83(b) election. By enrolling, you can pay taxes right away on the value of the stock, rather than waiting until it is no longer restricted. If you pay the taxes at the time you invest, all growth that occurs after will be considered favorable gain. Meaning, you will not have to pay taxes on that growth.
The government allows companies to pay a certain amount to further employee education. Take part in these programs if they are offered. Employer paid education is tax-free to the employee. It does not show up on your W-2 as income.
Single taxpayers that are paying out of pocket, for a graduate program, may qualify for a lifetime learning tax credit. The government gives substantial tax credits for single taxpayers to further their education.
Deductions and credits for families
A lot of things change when you start a family, but so does the deductions you can make on your tax return.
If you had a child born or adopted a child within the taxable year, you automatically qualify for dependency tax credits. Some taxpayers may even qualify for the child care credit. To start saving on taxes right away, make sure to add your child to the W-4 form provided by your employer. Adding a dependent to the W-4 reduces the amount of taxes and increase your take home pay.
A lot of money goes into adopting a child and some of those expenses can be reimbursed through tax deductions. Keep all documentation, records, and receipts for adoption expenses.
Working from home
The home office tax credit is a good way to reduce taxable income. To qualify for this tax credit, you must work at home and have a separate space within the home for an office or business. Because of new regulations, it is no longer necessary to itemize expenses for home based businesses. The government has made it easier to calculate home business deductions. You can now, take a standard deduction allowed per square foot of office space, up to 300 feet.
Taxpayers who are self-employed have a few ways to lock in deductions. They can hold off mailing receipts until the end of the year, then when payment is received, no taxes will be owed until the following year. Then, they lock in their deductions by claiming expenses on or around the first of the year.
Tax credits for higher-income tax brackets
Many citizens who fall within the higher-tax bracket, do so by owning high-income businesses or corporations. A lot of the tax deductions are business related.
For taxpaying business owners who run an unincorporated business, there could be a big break by allowing your children to work for you. The tax advantage to this, is if the child is under 18 and paid wages; then child tax does not apply. This means you have switched taxation from you to your child. But, the child is not old enough to be taxed and can instead be put into their Roth IRA account.
The choice of business you run also affects your taxable income. Choosing a sole proprietorship, corporation or LLC can help open the window for better tax breaks.
Business startup cost can be brutal. A significant portion is deducted from that taxable year. The rest of the taxes will be withheld over the course of several years.
There are ways for everyone to reduce taxable income. It is just a matter of taking the time to find what deduction you can use. If you have questions about how to reduce your taxable income, ask an Expert.