Out of all your obligations, I bet we know your least favorite. Paying taxes.
The feeling is common – according to Gallup’s annual Economy and Personal Finance survey of 2023, six in 10 Americans say that the amount of federal income tax they pay is too high, the highest level seen since 2001. Inflation hasn’t slowed down, leaving Americans looking for ways to make ends meet.
The people are frustrated, and we don’t blame them. However, the reality is that we often brace for the impact of taxes without realizing there are steps we could take to alleviate some of these burdens. At VIVA First, we want to help you keep more of your hard-earned money. But how?
By taking the time to set up your tax contributions properly, you can avoid those filing surprises and take control by paying only what you must in taxes. After all, you worked for it, right?
Utilize these tips and strategies to optimize tax planning this year:
- Understand your filing status
This step is foundational. Your filing status is used to determine your filing requirements, standard deduction, and your eligibility for certain tax credits. You should determine a filing status that is applicable and advantageous to you and your situation. The five different filing statuses are:
- Single
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er)
Your selection will have an impact on your return. Consult with a tax professional if you need help crunching the numbers on what’s best for you.
- Tax Deductions
Simply put, a tax deduction is an amount you subtract from your income when you file so you don’t have to pay tax on it.They are important and can be used tactically as a means to boost your tax refund. Common tax deductions include:
● Home ownership
● Medical expenses
● Charitable donations
Uncommon, overlooked tax deductions include:
● Gambling losses
● Small business expenses
These examples are only to name a few. The most important piece to remember is to keep your receipts for all deductions you plan to claim.
- Explore tax credits
Different from a tax deduction, tax credits are defined by the IRS as a dollar-for-dollar amount taxpayers claim on their tax return to reduce the income tax they owe. Whereas a tax deduction reduces the taxable income that results in a lower tax bill.
There are two types of tax credits. Refundable tax credits which are completely refundable, meaning any remaining dollars from a refundable credit are sent to you if your tax bill is reduced to zero. Lastly, nonrefundable tax credits which can reduce your tax bill to zero, but anything beyond will not be paid to you.
Significantly increase your tax refund with these popular tax credits:
● Child tax credit: Do you have a child under 17 years old? This credit is $2,000 for each qualifying child.
● Child and dependent tax credit: Do you come out of pocket for childcare expenses? This credit is for individual sand spouses who pay for care for their qualifying child or disabled dependent while working or looking for work.
● Earned income tax credit: If you’re a taxpayer with low earnings, this credit reduces the amount of tax owed on a dollar-for-dollar basis.
● Energy-efficient home improvements: Are you a homeowner? Tap into this 30% credit to cover the cost of some home improvements – efficient exterior windows, skylights, exterior doors, boilers, etc.
- Retirement account contributions
Certain contributions you make to individual retirement accounts (IRAs) or 401(k)s are not part of your taxable income,therefore resulting in lower taxability. So, contribute as much as you can toyour qualified retirement account to see the most benefits tax-wise.
- Review your withholding settings
Check out your W-2 to become familiar with your past earnings and withheld amounts. The taxes taken out of your paycheck are submitted to the IRS by your employer on your behalf. Your employer determines how much tax to deduct based on the information you submit on form W-4, also called the Employee’s Withholding Certificate.
Often, individuals complete this form on their first day of employment and never update it again. Changes in filing status, dependents, or additional sources of income can impact your tax liability. If you don’t withhold enough, then you may have to issue the IRS a payment when you file your income tax return. Consider completing a new form W-4 each year and when your personal and financial situation changes. With that said, aim to break even.
Make the financial decisions that are best for you and your family. We’ve said it before – you work hard for your money, so let’s keep more of that in your pocket! Utilizing these tips is a great place to start. Consult with a tax professional to further maximize your tax planning.
