What should I claim to not owe taxes?

Contribute to a Retirement Account. Open a Health Savings Account. Check for Flexible Spending Accounts at Work. Use Your Side Hustle to Claim Business Deductions. Claim a Home Office Deduction. Rent Out Your Home for Business Meetings. Write Off Business Travel Expenses, Even While on Vacation. More items...

money.usnews.com - Legal Secrets to Reducing Your Taxes - US News Money

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Taxes may be an inevitable part of life, but most people would probably rather not hand over a portion of their earnings to the government. “Tax bills can ruin your day,” opines Craig Ferrantino, president of Craig James Financial Services in Melville, New York. Fortunately, there are a number of completely legal ways to lower the amount you pay the taxman each year. These include credits, deductions and advanced investment strategies. Some tax savings are only available to small business owners or the self-employed, while other options can be used by everyone. The tax code can and does change frequently, but here’s a look at how to pay less taxes based on current law.

Contribute to a Retirement Account

Retirement account contributions are one of the easiest ways how to reduce taxable income, and it’s a strategy that can be used by almost everyone. Contributions to traditional 401(k) and IRA accounts can be deducted from your taxable income and, as a result, reduce the amount of federal tax you owe. These funds also grow tax-free until retirement. There are also Roth accounts that are funded with after-tax dollars. While you don’t get a tax deduction, money in the account grows tax-free and can be withdrawn tax-free in retirement. While contributions to workplace 401(k) accounts must be made by the end of the calendar year, tax-deductible contributions can be made to traditional IRAs up until the April 18 tax-filing deadline.

Open a Health Savings Account

If you have an eligible high-deductible medical plan, contributing to a health savings account is another way to lower taxable income. “That’s money that never gets taxed if you spend it on medical (expenses),” says Tatiana Tsoir, a certified public accountant and transformative business and finance coach. Contributions to these accounts offer an immediate tax deduction, grow tax-deferred and can be withdrawn tax-free for qualified medical expenses. Any balance left at the end of the year can roll over indefinitely, similar to the assets in a retirement account.

Check for Flexible Spending Accounts at Work

If you don’t have a high-deductible health insurance plan, you can still pay for medical expenses with tax-free dollars if your employer offers flexible spending accounts. FSAs use payroll deductions to fund an account, which can then be used to pay for expenses ranging from insurance copays to dental cleanings to over-the-counter medication. “Why use real dollars when you could use pretax dollars?” Ferrantino asks. Many employers offer FSAs for both health care and dependent care. In both cases, there are limits to how much you can deposit, and money may be forfeited if not used by the end of the year.

Use Your Side Hustle to Claim Business Deductions

Self-employed individuals (full time or part time) are eligible for scores of tax deductions, and Tsoir encourages people to start side gigs so they can take advantage of them. That means your freelance projects or time spent as a ride-share driver could land you considerable tax savings. A few of the business deductions available include business-related vehicle mileage, shipping, advertising, website fees, percentage of home internet charges used for business, professional publications, dues, memberships, business-related travel, office supplies and any expenses incurred to run your business. If you pay for your own health, dental or long-term care insurance, those premiums may be deductible, too. “You can save a ton of money if you do it right,” Tsoir says. IRS rules can be complex, however, so for some advanced tax savings strategies, it’s best to work with an accountant.

Claim a Home Office Deduction

If you work for yourself or have a side business, don't be afraid to take the home office deduction. To qualify for the deduction, the space must be used regularly and exclusively for business purposes. For instance, if an extra bedroom is used exclusively as a home office and it constitutes one-fifth of your apartment's living space, you can deduct one-fifth of rent and utility fees.

Rent Out Your Home for Business Meetings

Thanks to the Augusta rule, also referred to as the Augusta exemption or the 14-day rule, homeowners can rent out space in their home for 14 days and not report the income to the IRS. The catch is that the home cannot be the owner’s primary place of business. For business owners who don’t have a home office, this can be a way to reduce taxes. They can rent out a room in their house for a business meeting, deduct the cost from their business taxes and then not have to claim the rental fees on their personal tax return.

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Tsoir cautions against thinking you can charge your business an exorbitant amount as a way to avoid taxes. Instead, the price paid by the business needs to be in line with rental rates charged by comparable spaces in your market. Be sure to keep detailed records about when the meeting took place and its purpose.

Write Off Business Travel Expenses, Even While on Vacation

Combine a vacation with a business trip, and you could reduce vacation costs by deducting the percent of the expenses spent for business purposes. This could include airfare and part of your hotel bill, proportionate to the time spent on business activities. Talk to a tax professional about how to make this calculation correctly.

Deduct Half of Your Self-Employment Taxes

The government assesses a 15.3% Federal Insurance Contributions Act tax on all earnings to pay for the Social Security and Medicare programs. While employers split the cost with their workers, self-employed individuals are responsible for paying the entire amount themselves. To compensate for the extra expense, the government will let you deduct 50% of the amount paid from your income taxes. You don't even need to itemize to claim this tax deduction.

Get a Credit for Higher Education

The government offers valuable tax credits to offset the cost of higher education. The American opportunity tax credit can be claimed for the first four years of college and provides a maximum credit of $2,500 per student per year. Since it's a credit, that amount is deducted from whatever tax you might owe the government. If it exceeds the amount of taxes you owe, up to $1,000 may be refundable to you. Meanwhile, the lifetime learning credit is great for adults boosting their education and training. This credit is worth up to $2,000 per year and helps pay for college and educational expenses that improve your job skills.

See if You Qualify for an Earned Income Tax Credit

Even if you aren't required to pay federal income taxes, you could get a refund from the government. The earned income tax credit is a refundable tax credit of up to $6,728 for tax year 2021. The EITC is calculated with a formula that takes into consideration income and family size. The income limits for the credit range from $21,430 for single taxpayers with no children to $57,414 for married couples filing jointly who have three or more children.

Itemize State Sales Tax

Taxpayers who itemize their deductions can include either their state income tax or state sales tax on their Schedule A form. The state sales tax break is a great option if you live in a state without income taxes. While taxpayers can use a table provided by the IRS to easily claim their sales tax deduction, people should remember to add on the sales tax from any major purchase such as a car or boat. The federal tax deduction for state and local taxes is capped at $10,000 from all sources.

Deduct Private Mortgage Insurance Premiums

If you have less than 20% equity in your home, chances are you pay private mortgage insurance. This coverage is required by lenders as a way to protect them in the event that you stop making payments. Until 2017, taxpayers could deduct the cost of private mortgage insurance on their itemized deductions. While the Tax Cuts and Jobs Act eliminated the deduction, it has been reinstated by Congress each year and will again be available for tax year 2021 filings.

Make Charitable Donations

Charitable contributions made with payroll deductions, checks, cash and donations of goods and clothing are all deductible. You generally need to itemize to claim a deduction, and since the 2017 tax reform nearly doubled the standard deduction, many people choose not to itemize. “After the TCJA, donations kinda moved to the background a bit,” Tsoir says. However, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, allowed taxpayers who don't itemize to deduct cash donations of up to $300. This deduction is available again for the 2021 tax year, and married couples filing jointly can deduct a total of $600.

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Investors: When calculating the cost basis after selling a financial asset, make sure to add in all of the reinvested dividends. That increases the cost basis and reduces your capital gain when you sell the investment. If you sell your house, you may end up paying capital gains tax as well, particularly if your property's value has risen significantly. Single taxpayers can exempt up to $250,000 of their home's appreciation from capital gains tax, while married couples get a $500,000 exemption. The IRS only allows the exemption to be claimed once every two years. However, you can reduce how much you owe if you've made home renovations or improvements.

Avoid Capital Gains Tax By Donating Stock

Another way to avoid capital gains is by using stocks to make charitable gifts. Money moved into a donor-advised fund is not only exempt from capital gains tax but can also be deducted by those who itemize. Donor-advised funds can be started with as little as $5,000, depending on the firm you use.

Invest in Qualified Opportunity Funds

Although not accessible to everyone, qualified opportunity funds can save investors a significant amount of tax money, says Ian Formigle, chief investment officer for property investment company CrowdStreet. “Real estate investing is the most tax-advantaged vehicle there is,” Formigle says. “If you never want to pay taxes on (money invested in real estate), there’s a path to never pay taxes on it.” Qualified opportunity zones were created by the Tax Cuts and Jobs Act of 2017 as a way to revitalize designated areas. Investors can move eligible gains – such as money from the sale of stocks – into a qualified opportunity fund which invests in projects in these areas. Doing so lets you defer paying the capital gains tax on that money for up to 10 years. What’s more, after those 10 years, subsequent gains on the investment may be tax-free. Since these investments are complex, using a platform like CrowdStreet is one way to avoid running afoul of government rules. Working with an investment professional is another option. Be aware that many funds are only available to accredited investors who meet income or net worth requirements.

Claim Deductions for Military Members

Are you in the military reserves, such as the National Guard?

If you travel more than 100 miles from home and need to be away overnight, you can deduct unreimbursed travel expenses such as transportation, meals and lodging. If you're an active duty service member, you can deduct any costs associated with moving for a permanent change of station.

Don't Forget State and Local Tax Breaks

State and local taxes can add up, so don't forget to look for ways to reduce your tax burden there as well. While the federal tax reform law eliminated miscellaneous deductions, many states still allow them, or they may have a lower threshold for claiming them. For instance, in New Jersey, taxpayers can deduct the cost of medical expenses exceeding 2% of their adjusted gross income. On federal tax forms, only medical expenses more than 7.5% of a person's income are deductible. Tax savings aren't limited to income taxes either. In New York City, for example, there is a parking tax for some rented spaces, but residents can effectively waive a portion of the fee by requesting an exemption.

money.usnews.com - Legal Secrets to Reducing Your Taxes - US News Money

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