Every year, the Internal Revenue Service in the USA announces the date when they start accepting and processing federal tax returns. It usually begins January 1st, while the deadline is typically the 15th of April. This time frame is given for individual and business taxpayers to prepare their financial reports and submit it to the IRS. If you think that you would not be able to meet the deadline, you need to request for an extension beforehand. There are many ways to save money and we know them all!
Those who are considered average earners can file their income tax returns themselves while those who have more than one source of income, or big corporations may want to seek the help of a tax preparer or an accountant. If you’re doing it yourself, the goal should be to maximize your tax deductions and tax credits while lowering your tax burden. Some of the most important deductions are real estate taxes, mortgage interest and interest on student loans. For couples with kids, they can include child care costs, 401(k) contributions, individual retirement accounts and qualified education costs.
This may sound like it’s a lot to handle especially for those who have just started to earn their salaries or profit from their businesses – but filing taxes is a must. Here, we will take a look at the tax filing mistakes that you should avoid in the first place, and the ways to save money on your taxes.
Know which Tax Filing Mistakes to Avoid in the First Place
You can easily make mistakes when filing taxes because the IRS continues to update their forms and rules. Just to be on the safe side, here are a few classic mistakes that you should avoid during the tax filing process:
Waiting until the deadline to file your taxes.
As soon as the IRS announces through their website or through USA.gov that they will begin to accept and process tax forms on this date, that’s as good a time as any for you to start putting together all your paperwork. In fact, you should think about it before the year ends because all the expenses that you would make on the last month will affect the amount that you’d have to pay. From January, you have until April to complete all your paperwork. Do not wait until the deadline is almost there before filing your taxes. You need to come up with some ways to save money and fast!
Filing your taxes on paper instead of electronically.
30% of Americans still file taxes on paper. Not only will you be slowing down the refund process this way, but old fashion paper filing can easily lead to mathematical errors. Anyone who’s earning less than $57,000 per year can file their taxes electronically for free using a brand name software, so the no fees rule should make it easier for you to ditch the paper printing process. Probably the best ways to save money include paying attention when filing your taxes.
Not updating your household status.
If you’re newly married, just had an additional member of the family, had a divorce, lost your job – all these change in statuses will affect the amount of income tax returns that you would have to file. If you have complicated domestic situation, consult with a tax preparer on how you should file your taxes so you won’t make any mistakes.
Having too little or too many deductions on business expenses.
Small business owners usually make the mistake of having too little or too many deductions on their business expenses. If you’re not sure, check out the IRS website to know which deductions are allowed and which ones are not. Need more ways to save money? Keep reading!
Failing to file all the required paperwork.
Again, the forms are constantly updated so you have to read all the current rules about which paperwork should be sent out when filing your taxes.
Not tracking charitable contributions and paying for previously deferred taxes.
Another mistake that you should steer clear of is not paying for previously deferred taxes. This usually happens on converted retirement accounts or first time home buyers who are now paying back part of the credit. Consult a tax preparer if you’re not sure what the rules are for previously deferred taxes. In the same vein, make sure that all your charitable donations are tracked. If the donations are worth less than $500, you can report it on your tax form but make sure to keep the receipt. Anything in excess of that amount should be filed as Form 8283 for IRS purposes. These ways to save money will help you out more than you think!
Discover How to Save Money on Your Taxes
Now that you already have an idea about which mistakes to avoid when filing for taxes, how can you save money during the process? As mentioned earlier, your goal should be to maximize deductions and tax credits while legally lowering your tax burden. Here are the best ways to save money on your taxes:
Do you qualify for earned income tax credit?
There is such a thing as an income tax credit which applies to those who are earning low to average salaries. The earned income tax credit can amount up to $6,000 – and applies to anyone earning less than $50,000 annually. If there was a recent addition to your family, you may want to check out if you qualify for this so you would not lose out on the benefit.
Think about your children when filing for taxes.
Depending on the number of kids that you have at home, there are a handful of tax-related benefits that parents can take advantage of. You can deduct the cost of child care costs to your income tax returns. Typically, a child tax credit runs up to $1,000 for each kid under 17 years of age. However, this tax benefit has been phased out for high earners. If you’re receiving alimony payments that is also tax deductible.
Naturally, having kids would mean that you should also save up for their college-related expenses. If you have a 529 savings account for your child, you can take advantage of its tax-free benefits. Most ways to save money will make you feel deprived, but this is clearly not the case!
Extend your mortgage if possible.
If you’re still paying for mortgage, its interest payments are tax deductible. By keeping your mortgage as long as you can will allow you to enjoy additional tax benefits. The only exception s if you do not plan to stay in the same home for a long time, in which case different tax filing rules may apply.
Make sure that you’re putting money towards your retirement.
More than the college tuition for your kids, it’s your retirement money that should be your main priority when saving up. If you can, cut back your take home pay by voluntarily upping your contributions to your retirement funds. Most people only save up for retirement when it’s too late. Even then, the money that they would end up with may not necessarily be enough for them to lead a comfortable life during retirement – so their choice is to work longer or simply scale down their lifestyle. If you are saving up for a 401(k) fund or an Individual Retirement account, there are tax benefits that you will get to enjoy. There are no better ways to save money than to spend money wisely!
Keep track of health-related expenses which are tax deductible.
Acupuncture, bandages, breast pumps and certain health-related expenses are tax deductible. For a complete list of the items eligible for tax deductions, visit the official website of the IRS.
If you just acquired a new job, keep track of the costs.
Let’s say that you switched jobs and your new office is 60 miles farther from your home than your old office. If you decided to move to a nearer place, you can deduct the moving costs, the driving costs and other related expenses when filing taxes. There is typically no need to itemize the expenses but just like everything else in your income tax returns, make sure to keep all the receipts. Need more ways to save money? Better give up on a few facilities, like worthless securities.
How about worthless securities?
If you invested in securities that have become worthless for the past seven years, you can file that as a tax deduction. The same thing holds true for ordinary losses on the sale of a stock – which can be filed under capital losses. It can later on offset capital gains and there’s a maximum amount for mutual funds, ordinary income and married couples who are filing separate income tax returns.
Make your home more energy efficient.
If you recently invested in a fancy solar energy system or if you did some upgrades to make your home more eco-friendly, you can file for a $500 tax credit which is the lifetime maximum. For smaller projects like energy-efficient windows, the maximum amount that you can claim is $200. Another related tax deduction is alternative energy equipment installation. The amount is usually 30% of what you will spend on solar water heaters, geothermal heat pumps or wind turbines. This tax credit is available until 2016.
Although the act of filing taxes is done at a certain time of the year, the overall process of saving on taxes is something that can be done year-round. For every lifestyle change that you go through and every financial decision that you make, there might be tax benefits that can enjoy – so keep these in mind when finally filing your taxes. There are many ways to save money, but a good start would be to make sure you did your best when submitting your tax form. Good luck!