COVID produced a nationwide lockdown, creating the worst economic downfall since The Great Depression.
Recognizing this, the IRS has postponed the tax deadline to give taxpayers some more time to prepare their tax payments. But an extra month may still not be enough to help taxpayers pay their taxes.
Fortunately, there are still many ways to reduce tax liability. Although not explicitly said by the IRS, you can take advantage of the multitude of ways that you can lower the amount of taxes you owe.
Continue on to understand five ways on how to reduce tax liability. You can potentially save thousands of dollars by following just a few of these tips.
1. Home Office Deduction
You can deduct any home office expenses related to self-employed/freelance work. To qualify, your business must necessitate the working space and supplies/utilities you itemize.
Work-related devices such as desktops/laptops are deductible as long as your work requires their use. Meaning that it’s good to deduct if you’re a digital content writer or a remote computer engineer. But if you’re a coffee shop owner, the IRS generally won’t accept full device deductions.
Internet bills, a portion of your rent, etc can all help you pay less taxes. Just make sure you’re precise when calculating how related these items are to your business.
2. Investment Loss Deduction
If you’ve sold investments for a lower value than you bought them for, you can enter this loss to minimize tax liability. This is also called tax-loss harvesting.
Losses up to $3000/year are currently acceptable. You can claim remaining losses beyond that price tag when you file taxes for the next year.
You might also want to wait before selling an appreciated investment. Investment gains will add to the taxes you owe, which can exacerbate your burden instead of relieving it.
3. Retirement Fund Contributions
Contributing to your retirement fund will not only save money for retirement, but lower your taxes. To do so, defer part of your salary to an employer-sponsored retirement plan, usually known as a 401(k) plan.
Max out the portion of your salary deferred to your retirement fund. If you’re going to owe taxes anyway, might as well lower your owed taxes and maximize your retirement finances.
4. Higher Education Expenses
Attending a four-year college is expensive. Luckily, the government will deduct a maximum of $2,500 per student from their taxes every year.
So make sure you get your school’s 1098-T form. If you’re attending college now, log tuition expenses, book fees, and any expense that’s vital to your education. You can even receive up to $1000 if you receive a tax refund.
5. Self-Employment Tax Deductions
Self-employed workers pay the full tax amount since they don’t have employers or co-workers to split the cost with. This comes in the form of Medicare and Social Security taxes. Have a look at Pacific Accounting Group’s tax planning service to understand how to optimize your tax gains.
Luckily, the government allows a 50% income tax deduction. Being an “employer” is considered an expense in and of itself, so factoring that into your deduction will lower the taxes you owe.
Reduce Tax Liability This Tax Season
The US experienced steep economic drops in 2020, so it’s no wonder people are so hesitant to file their taxes on time. Many taxpayers may have estimated tax liability much steeper than they’re able to pay. But taxpayers can learn how to reduce tax liability and take advantage of the IRS’s postponed tax deadline.
This article should have taught you how to pay fewer taxes. One of our missions is to help readers understand and improve their finances. If this post did just that, then check out our other financial articles!