Ways to save on taxes

There are several ways to save taxes in any given fiscal year. The earlier in the year one starts thinking and preparing about taxes, the more options one has to save on taxes. Lowering taxes can be achieved in every income bracket level with the right tax savings awareness and strategy. This article will demonstrate some of the possible steps that may lead to lower taxes in terms of 1) tax information, 2) common tax strategies, 3) lowering adjusted gross income, and 4) other non-income tax techniques.

Tax information

A good first step in saving on taxes is to have access to the right information. To gather the right information it can first be a good idea to estimate adjusted gross income, tax deductions and any tax credits one has in the case of 1040's, the standard U.S. Individual tax form. From there, one can determine what tax bracket one is in, for example 15 percent.

Tax information can be obtained from a number of sources including the U.S. Internal Revenue Service, county tax offices, tax accountants, financial advisors, tax attorneys etc. The difference between tax information and tax advice is that advice must be obtained specifically from certified and/or licensed tax professionals. The more pertinent information one has in regard to saving money on taxes the better because then one can apply that information to a tax saving strategy.

Tax saving strategies

There are several ways taxes can be saved either through a strategy, or tax savings tactics, or both. Tax strategy involves a long term tax saving plan such as annual contributions to either tax exempt or tax deferred retirement savings vehicles such as Individual Retirement Accounts (IRA's) and life insurance policies with retirement annuities built in.

In the short run, other tax methods that are commonly used are tax deductions in excess of one's qualifying standard deduction. In other words, if a tax filer can itemize deduction on Schedule A that are higher than the standard deduction, it has more tax savings than using the standard deduction. Items that are deductible on IRS Schedule A include mortgage interest paid, paid taxes, job expenses, charitable donations and miscellaneous expenses. (IRS Schedule A

Additional tax deductions that can be taken along with either the standard or itemized tax deductions include exemptions, education credits, child credits, foreign tax credits and savings credits, self-employment tax deduction, tuition deduction and student loan interest paid deduction. ( IRS Form 1040 ) For a complete list of deductions, consult the IRS forms and instructions.

Lower tax by reducing adjusted gross income

The key to saving money on taxes as an individual tax filer is to have the lowest adjusted gross income possible as this is the amount that is used to determine tax. Since deductions and credits lower taxable income, qualifying for deductions that don't cost money but either defer or allow money to grow tax free are ideal. For example, for a regular filing of a 1040 with no other forms required other than W-2's and 1099's, an income below a certain amount does not require tax filing at all, however if tax is due to that tax filer, a tax return should be filed to receive withheld taxes.

All income earned by an American overseas is taxable in the United States if that person is a resident of the United States for more than 6 months of the year. Some persons who don't live in the United States, who are American simply don't live in the U.S. and have all their assets, income and investments in foreign banks, trusts, or tax protected instruments. In some cases this may be legal avoidance of tax due to the U.S. Government, and in other cases it may not. Knowing the difference between legal and illegal tax savings techniques is key to complying with tax laws.

Non-income tax saving techniques 

Since income tax is not the only tax Americans pay, it can be prudent to consider other tax savings techniques as well. For example, tax on everyday items such as food, gas, property, automobiles, retail purchases, utility services such as cellular phones etc. all add a considerable amount of tax payments in excess of both federal and state income tax. Naturally, these types of taxes add up as well so avoiding having to pay them through legal tax saving techniques can also lower tax and increase disposable income.

To lower non-income tax consider making normal purchases via the Internet if the shipping and price together are less than the same item(s) would be had they been purchased retail with tax. Secondly, some states tax more for certain products such as gas and food. If one lives close to a state line consider making purchases for certain products with lower taxes in the other state if the cost of gas does not offset the tax savings.

Automobile and property taxes can also be quite high, in which case the lower the value of both, the less tax will be paid. Evidently then, driving one car instead of three, and driving an economic model of car, perhaps even used will minimize this type of tax paid. Secondly, for property tax on homes, consider living in rural areas rather than urban areas if the cost of tax is greater than the transportation costs to and from any pertinent locations such as places of employment, food stores, garbage dumps, entertainment venues etcs.

Lastly, to save even more on taxes, growing as much of your own food as possible on a rural property with low income tax in addition to driving a used economy model vehicle could save a bundle. Also, consider avoiding highly taxable services such as cell phones because they charge a great deal in additional taxes in comparison to land-lines Being as self sufficient as possible can reduce the need for a number of products and services, and hence taxes.

Summary

There are many ways to save taxes just as there are many types of taxes. Taxes are everywhere and are usually tied to things that are either consumed or income that is received. This is not to say there are ways to reduce these taxes because there are. In some cases only a few adjustments to where one puts money may be needed, but in other cases larger more definitive lifestyle changes may be required. Which ever the tax saving strategy or technique one uses, researching and learning as much information as possible about saving taxes is an important step in becoming aware of how to reduce taxes.

Sources:

1. http://www.irs.gov
2. http://www.irs.gov/formspubs/index.html
3. http://www.irs.gov/pub/irs-pdf/i1040sa.pdf
4. http://www.irs.gov/pub/irs-pdf/f1040.pdf

Difference Between a Tax Credit and Tax Deduction

There are a few differences between a tax credit and a tax deduction. These differences can pertain to (1) the affect on tax owed, (2) how they are reported, (3) how they are determined, (4) what they are derived from, (5) how they are qualified for, and (6) the reasons for their existence. Tax credits and tax deductions are financial, legal and political tools with different goals, functions, calculations and varying degrees of benefit. Financially, the benefit of reduced tax is well recognized, and may be held as most important by tax-payers.

• Direct vs Indirect reduction to tax owed
• Tax deductions are calculated before tax credits
• Credits can have a greater impact on tax due
• Tax credits often require individual forms to be filed
• Both may serve different functions, and goals
• Tax credits may apply to a smaller demographic

One of the most financially beneficial differences between a tax credit and a tax deduction is the amount of tax that is reduced from the tax filers obligation to the Government. In other words, the tax savings and potential tax refund is often higher with tax credits than with tax deductions. For example, a tax credit of $400 would require a tax deduction of $1,600 at a 25% tax rate to amount to the same reduction in tax owed to the Government. Thus, the more tax credits a tax filer can legitimately qualify for, the better it is for reducing tax.

Tax deductions and tax credits are reported using the IRS Form 1040 for individual and family tax filers. Deductions are either reported on the Form 1040 and/or with a Schedule A whereas tax credit are recorded using specific tax credit forms. Moreover, multiple deductions can be recorded and added on an IRS Schedule A, however tax credits are determined and recorded one at a time with different forms.

There is more paperwork required to be submitted for tax credits than tax deductions. An example of a tax credit is the Child Tax Credit that requires one to be the parent of a qualified child to be claimed according to IRS Form 972 the U.S. Department of the Treasury’s ‘1040 Forms and Instructions’ publication.

The legislation governing tax credits and tax deductions is different. Tax deductions tend to be more generalized whereas tax credits may be more targeted. Moreover, tax credits involve specific short-term Government agendas such as stimulating the economy, boosting a sector in the economy or assisting a specific population group. Tax deductions on the other hand include expense reductions that many people of a larger demographic may qualify for over time. For example, mortgage interest expenses are a tax deduction that can be claimed on IRS 1040 Schedule A. However, the First Time Homebuyers Tax Credit and the Repeat Homebuyers Tax Credit both expire and require the property to be a primary residence. Hence, the tax credits are more limited than the mortgage interest deduction.

The aforementioned difference between a tax credit and tax deduction is not always the case, or at least, does not always hold such a pronounced difference in function. This is evident in the IRS Hope Education Credit and the IRS Tuition and Fees Deduction. Both the Hope Education Credit and Tuition and Fees Deduction are tax reductions based on educational expenses. Besides the affect they have on tax due, they serve similar ends i.e. to help assist the goal of education. In this sense they are similar, however the tax credit amplifies the tax benefits by also assisting parents of students who help pay for their children’s education and those with incomes below a certain level.

Another difference between a tax credit and a tax deduction is how they are calculated. The two kind of have an inverse pattern in terms of how they are calculated and reported. Tax credits may be a percentage of a total expense but a direct reduction to tax whereas a deduction may be a direct reduction to taxable income, but only a percentage reduction to tax. Tax credits may also rely less on worksheets, and more on tax forms for their calculation and determination. For example, IRS Form 8863 is used to claim the Hope Education Credit whereas the IRS Student Loan Interest Deduction Worksheet is used to determine the Student Loan Interest Deduction.

In summary, the difference between a tax credit and a tax deduction varies depending on the specific deduction and credit being claimed. However, tax deductions may be less likely to have maximums than credits, are often able to be claimed by a wider group of tax payers and don’t always expire as quickly as some tax credits. Tax credits are reported on IRS Form 1040 like tax deductions, however tax credits often also require the use of specific tax forms designed for the tax credit whereas deductions may use IRS 1040, Schedule A instead.

Tax credits can reduce taxes more than tax deductions if the tax credit is greater than the percentage amount of the tax deduction claimed. Sometimes, tax deductions can be claimed alongside tax credits even if they serve similar purposes, an example of such being the traditional IRA deduction and the Retirement Savings and Contribution Credit. So even though there are differences between the tax credit and tax deduction there are also similarities and tax credits do not necessarily amount to more than a tax deduction.

Source: http://www.irs.gov (U.S. Internal Revenue Service)