In uncertain economic times, with the cost of living crisis and a recession looming, taxpayers need ways to help alleviate financial burdens.
Thankfully, the tax system offers a range of legal strategies known as "tax loopholes" that can help individuals and businesses navigate the complex maze of regulations.
By understanding and utilizing some loopholes, individuals and businesses can optimize their financial planning and potentially reduce their tax liabilities.
Here are ten ways to take control of your taxes, and navigate the ups and downs of the economy while keeping more of your hard-earned cash in your pockets.
Remember to consult with a tax professional to ensure you comply with tax laws and maximize your deductions.
1. Utilize all available deductions and credits: The IRS offers various tax credits and deductions, such as for energy-efficient purchases, health insurance premiums, and higher education expenses. Check the IRS website to see which ones you may be eligible for.
Keep track of your purchases throughout the year to identify potential tax credits you may be eligible for.
On the IRS website, you can explore the 17 different tax credits available and determine which ones apply to your situation.
2. Make energy-efficient modifications: Homeowners can claim credits for installing energy-efficient improvements like heat pumps, windows, doors, insulation, solar panels, and more. There's also a clean vehicle tax credit for buying a qualified electric car.
Take advantage of the opportunity to claim up to $3,200 in annual credits for energy-efficient home improvements like heat pumps, windows, doors, and insulation until 2032.
If you're considering buying a new electric car, remember that you may qualify for a clean vehicle tax credit of up to $7,500.
3. Enroll in college and get credit: Enrolling in college can reduce your tax bill. The American Opportunity Tax Credit and the Lifetime Learning Credit offer deductions for tuition, fees, and course materials.
Evaluate your eligibility for education tax credits like the American Opportunity Tax Credit or the Lifetime Learning Credit to help offset the cost of tuition, fees, and course materials.
Utilize financial aid options such as grants and work-study programs, which provide tax-free cash that doesn't count as taxable income.
4. Detail your tax expenses individually: Instead of taking the standard deduction, consider itemizing your deductions if you have substantial payments for mortgage interest, property taxes, medical expenses, state taxes, or charitable contributions. Use the IRS tax assistant tool to determine which deduction is greater.
If you have significant expenses like mortgage interest, property taxes, medical costs, state taxes, or substantial charitable contributions, consider itemizing your deductions to potentially reduce your taxable income.
Use the IRS tax assistant tool, a helpful resource that guides you through the process of determining whether the standard deduction or itemized deductions will be more beneficial for you.
5. Provide donations to charitable organizations: Donations to registered charities are deductible, including cash, goods, clothing, and contributions made through payroll deductions. Remember, only itemizers can deduct charitable donations.
Keep in mind that only individuals who itemize their deductions can benefit from deducting charitable donations.
Remember to gather the necessary documentation for your donations, including receipts and acknowledgements from the registered charity.
6. Try a health savings account (HSA): HSAs allow you to set aside pre-tax cash for medical expenses, reducing your taxable income.
A health savings account (HSA) allows you to contribute pre-tax money, reducing your taxable income while providing funds for future medical expenses.
Take advantage of the tax-free nature of HSA withdrawals when used for qualified medical expenses, making it a valuable tool for managing healthcare costs.
7. Enroll in a flexible savings account (FSA): FSAs can be used for healthcare spending and offer pre-tax contributions. Use the funds within a year to avoid forfeiting them.
A flexible savings account (FSA) is a pre-tax account that can be used to cover eligible healthcare expenses.
Be mindful that funds in an FSA must be used within the designated period to avoid forfeiture.
Determine your healthcare spending needs and contribute to your FSA accordingly, up to the maximum allowed amount.
8. Contribute to a 401(k) retirement plan: Contributions to traditional workplace 401(k) and IRA accounts are tax-deductible and grow tax-free until retirement. Maximize contributions before the deadline.
By making contributions to a traditional 401(k) or IRA account, you can lower your taxable income for the year and enjoy tax-free growth on your retirement savings until withdrawal.
Remember to take advantage of the deadline flexibility for IRA contributions, as you have until the tax-filing deadline to make contributions for the previous tax year.
9. Liquidate stock holdings: Selling underperforming stocks at a loss can offset taxable capital gains. Donating stocks can also help avoid capital gains tax while supporting a charity.
Capital losses from underperforming stocks can be used to offset taxable capital gains, potentially reducing your overall tax liability.
Consider donating appreciated stocks to a charity to bypass capital gains tax while supporting a cause you care about.
10. Deduct business travel expenses: If you combine a vacation with a work trip, you can deduct a portion of the expenses spent on business purposes, such as airfare and hotel bills. Ensure the deduction is proportionate to the time spent on business activities.
If you engage in business activities during a vacation, you may be able to deduct a portion of your travel expenses such as airfare and hotel bills that are directly related to your work.
Ensure you maintain proper records and consult with a tax professional to accurately calculate the deductible portion of your travel expenses.
