There are plenty of ways the average American can claim major tax benefits.
As we trudge forward into tax season, here are seven secrets to pulling in more money in tax deductions each year — secrets taken straight from the knowledge bank of those who know it best.
1. Bunch your deductions.
GIF from “Hail, Caesar!”
If you're a salaried employee, and you get paid on a W-2 tax basis, you should pool your itemized deductions as much as possible. Itemized deductions are eligible expenses you can report on your tax returns to lower your taxable income.
The more deductions you take over that 2% adjusted gross income threshold, the lower your income tax bill will be. What does that mean, exactly? Well if you have planned deductible expenses, like medical care, spread out over the next couple years, try to pay for them all this year. That way you can claim them as one lump sum on your Schedule A tax form, and you get more money back.
2. Take your work-from-home deduction.
Image by krzyzanowskim/Flickr.
If you work from home, you can deduct a surprising number of things. One big one is the portion of your house that you use for work. This space must be used exclusively for work, on a regular basis, either as your principal place of business or as a place to meet with patients, clients, or customers. For example, if you have a four-room apartment and use the second bedroom only as an office, you can deduct a quarter of your annual rent plus utility fees. But that’s just the beginning. You can also deduct your cell phone bill, Internet bill, all office supplies, including your computer, shipping costs, advertising costs, membership dues, and business travel — just to name a few.
3. Count your out-of-pocket charitable contributions.
GIF from “Sense and Sensibility."
If you regularly buy pet food for the animals you foster from your local shelter, you can deduct it. If you do a lot of driving for your kid’s charitable after-school program, you can deduct 14 cents for every mile. Charitable donations come in many forms, not just big checks. It may take some time to parse it all out, but it definitely adds up.
4. Put money into retirement ... starting now.
Whenever you contribute to a Roth 401(k) or a Roth IRA account, you’re setting yourself up for success because you don’t have to pay taxes on that amount when you withdraw it. The Roth 401(k) in particular has no income limitations, so if you’re employed full-time by a company that offers 401(k) options, you’re eligible. You can deduct the contribution you make to it from your annual taxable income too (an all-around win). The best part is this growing chunk remains tax-free until you retire, so the more you put in there, the better.
5. Don’t forget about state sales tax!
Image by Philip Taylor/Flickr.
This primarily affects states that don’t impose an income tax at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In these states, you can deduct the sales tax you paid on any large or expensive items you purchased, as long as the tax isn’t over the state’s general sales tax rate. The IRS has a handy calculator to help you total these types of deductions.
6. Outsmart the capital gains tax.
GIF from “Spaceballs.”
Stockholders who have stocks that did well this year and who want to sell them normally have to pay a 20% capital gains tax on them. However, the tax is actually taken on the difference between gains and losses, so if you sell stocks that took a loss along with ones that made a profit — rather than selling them one at a time — you’ll be cancelling out that tax altogether. Oh, and you’ll be simultaneously knocking off the income tax you’d normally have to pay on up to $3,000 of your annual income. Win.
7. Get paid through dividends rather than income.
Own your own business? Here’s a little trick from the one-percenters: you pay less taxes on dividends than you do on salaried money. So if you make less than $400,000 a year and you turn a good portion of your income into dividends (a distribution of your company's earnings to its shareholders), you’ll only have to pay a 15% income tax on it. However, you’ll still need to designate a reasonable amount of your income to your salary; otherwise, you’ll get some negative attention from the IRS.
With these pro tips, you're off to a good start.
So share these tips with your family and friends and then enjoy an extra coffee with that extra cash in your wallet. Get 'em in soon – tax season will be over before you know it!
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