Understanding Your Tax Bracket
The first way to learn how to save money on taxes is to understand which tax bracket you fall into. An easy way to save if you are just above a certain tax bracket, is to try to reduce your taxable income so that you can be taxed in the lower bracket. You can do this by investing more money into a 401(k) plan, or by giving a charitable donation. For an individual who is a few hundred dollars into a higher tax bracket, the donation will be offset by the reduction in your tax rate.
Your filing status can also save you money in certain circumstances. If you are married and have children, filing a joint return will allow you to take advantage of many tax credits aimed at families. If you are married with no children, and both partners are high-income individuals, it sometimes makes sense to file "married filing separately." When filing taxes, if appropriate, look at the different filing scenarios available to you in order to reduce your total tax bill.
There are two different types of deductions that are applicable to most people; they are standard and itemized deductions. Most taxpayers claim the standard deduction, but for individuals who have a high number of qualifying expenses, claiming itemized deductions will save you money on your tax bill. Qualifying expenses include medical bills, charitable donations, casualty losses, and unreimbursed job-related expenses. Add up these expenses to see if filing itemized deductions will save you money.
Above-the-line Tax Deductions
Whether you file itemized deductions, or if you choose the standard deduction, you are allowed under the Internal Revenue Service, or IRS, policy to claim additional deductions for qualifying expenses. These deductions, which can help you save money, include student loan interest deduction, tuition and fees deduction, Alimony payments, IRA contributions and moving expenses related to a job change. Take advantage of these deductions to reduce your taxable income.
Schedule C Tax Deductions
If you are abusiness owner, or if you have a part-time home-based business or qualifying hobby, you can opt to file a Schedule C, and take additional deductions. Say, for instance, you make homemade goods and sell them at craft fairs, you can deduct certain expenses related to that business, even if it is not your primary source of income. There are a lot of rules regarding these deductions, but they can add up to significant savings. Talk to a professional if you think you want to file a Schedule C.
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