Do you feel like you will be paying more to Uncle Sam than you should this tax season? You probably have a high tax liability than you should.
Also, wanting to reduce this amount, to the least amount possible, is quite valid. Part of tax planning involves optimizing and reducing your tax liability as much as possible. While there are legal ways to reduce taxes, many taxpayers have no idea how to go about it.
As your self-appointed tax advisor, we have taken the liberty of showing you all the tax tips you need to lower your year-end tax liability.
3 basic and legal tax strategies will help you reduce your tax liability:
The key measure of your taxable income is your Adjusted Gross Income (AGI). It also determines your tax credits and tax rate. If your AGI is too high, you will not be able to claim tax credits.
Your AGI depends on how much money you make - the higher your total income, the higher your AGI, and the higher your tax liability. The vice versa is also true.
The difference between your total taxable income from all source and any qualifying adjustments or deductions make UP your AGI.
Some of the additional sources of income include, but are not limited to the below:
When it comes to adjustments, you can use the below deductions to reduce your AGI:
Instead of itemizing these deductions or additional sources of income, you can use Form 1040. The more sources of additional income you have, the higher your AGI. Higher deductions for adjustments will, however, reduce your AGI.
Higher tax deductions will reduce your taxable income thus reducing your tax liability. According to IRS, you can claim the standard deduction depending on your filing status, or you can itemize your deduction.
But you cannot do both. For itemized deductions, you have to sum up all the allowable deductions for that year.
If you decide to itemize your deductions, below are some of the expenses you can claim:
We know how hectic it is to track all your expenses at the end of the year. One of the main tax planning strategies to help you hack this is using a tax planning software or keeping records of your expenses as they happen in excel.
The new tax plan deductions for anyone claiming a standard deduction for 2019 returns are:
The catch here is deciding which of these to use, and taking the one with the higher amount is the most deal. If, for example, your filing status is a single filer, and your total itemized deductions sum up to $15,000.
The ideal strategy here is to itemize your deduction and claim the $15,000 instead of the standard $12,000. However, if your itemized deductions sum up to $11,000, you will be better of claiming the standard deduction of $12,000.
While tax deductions directly reduce your taxable income amount, tax credits will directly reduce your tax liability amount.
In case you have a tax liability of $6,000 after adjusting your income and taking tax deductions, and you less a tax credit of $3,000, your total tax liability will be $3,000. See how easy it is to lower your tax liability?
One of the tax credits you can apply in your return is the Earned Income Tax Credit (EITC or EIC). This tax credit is for working individuals with low incomes.
To qualify for EITC, you must have received income during the year wither from your farm or business, or by working for someone and file your tax returns. Additionally, it would help if you also met either of these:
If you are not sure of this qualification, the EITC Assistant will help you determine whether you qualify for the credit or not.
The other tax credit you can claim in your return is the Child Tax Credit. If you have a child who is less than 17 years old as year-end, depends on you and lives with you for more than 6 months of the year, you can claim $2,000.
Also, the qualifying child must have a Social Security Number before the due date of filing tax returns, extensions included.
The best part is that the Child Tax Credit is refundable, meaning you can get a refund by claiming this credit even if your tax liability is zero. For every qualifying child, you can claim a refund of up to $1,400.
Children are not the only individuals you can claim dependent credits. Qualifying relatives like parents, children above 17 years of age, and other qualifying relatives that depend on you can also get you a tax credit.
If you have not filed your 2019 returns, you can use the above tax tips to optimize and reduce your taxes. Talk to your tax advisor, and do not shy from asking all the questions you have. By the end of it all, you will reduce your tax liability and even earn a tax credit.