When you owe taxes at the end of the year, it can be frustrating to see everyone getting a refund while you’re stuck with a bill. Getting a refund is a complex process, but the bottom line is that you’ve overpaid on your taxes, and the IRS refunds some of your money. However, if your tax expenses are too high, you’re much less likely to get a refund. So, in today’s guide, we’re going to take a closer look at three easy ways to save on your taxes.
These tips apply to anyone filing this year—individuals, couples, and first-time filers. It’s that time of year again, so get your paperwork together and let’s begin.
1. Change Your Withholdings
The first thing you can do to reduce your tax expenses is to change the withholdings on your federal W-4 form. This is the form you fill out when you become employed, and it tells your employer how much tax to withhold from your earnings. The great part about this form is that you can amend it, so you’re having less or more withheld from each paycheck or your yearly earnings.
The more dependents you claim on your W-4 form, the less is withheld from your income. This could mean you’ll owe tax at the end of the year. Most will claim themselves, of course, and even if you have children, you don’t necessarily have to claim them on your W-4 form. You can save that for the end of the year when you file for a return. There’s also a section for “other withholdings” that you can adjust. Are you withholding anything for personal reasons? Make sure you’re withholding as little as possible, so you can ensure you’re paying the proper amount of tax.
You can also redirect your withholdings to something else, like an IRA or an HSA (health savings account). Each of these has specific tax rules (which you can find here), but the bottom line is that you’ll be able to keep more of your money without being taxed.
You can also start a tax-free savings account
Don’t Incur Penalties
Of course, one of the best ways to save money on your taxes is to make sure you’re not incurring penalties throughout the year. This means paying taxes by the April 15th
(accurate for 2021), paying the proper amount of taxes, and filing correctly. Failure to file or incomplete filing can incur penalties, and, of course, providing inaccurate information can also land you in hot water. Always use a tax professional when you can, especially if you have a complex tax situation.
The bottom line? Pay your taxes in time to avoid penalties, and make sure you’re providing accurate information.
2. Use Your 401(k)
A 401(k) retirement plan can act as a funnel for a certain amount of money each year, tax-free. It’s an employer-sponsored retirement plan, and your employer will often match what you put into it (up to a certain amount). This plan is eligible for certain tax benefits in the eyes of the IRS. The maximum amount you can defer to your 401(k) plan as of 2021 is $19,500. That’s nearly $20,000 per year you can defer to an account with special tax benefits! Not to mention, you’re saving for retirement, which is something everyone should be doing as soon as possible.
One of the best benefits of using a 401(k) is that you can deduct those contributions from next year’s tax return. In some cases, the 401(k) is also safe from creditors (including the IRS). With high contribution limits, employer matching, and safety from creditors, the 401(k) is not only one of the most popular retirement vehicles, but also one of the most practical.
If you decide to make withdrawals from your 401(k) plan, you might owe taxes on that amount. It’s best to contribute as much as you can to your 401(k) throughout the year and then leave it alone. Many people think of the 401(k) as a sort of savings account, but you don’t want to tap into it every time you need some extra cash.
3. Home Office Expenses
If you’re working from home, there’s good news! You can potentially deduct the expenses related to your home-based business from your taxes, and you may be eligible for a home office space credit. You must have a room which is used principally for conducting business in your home. You must use this room regularly and exclusively for business, and be able to prove that you’ve incurred expenses to either improve or construct/renovate it/use it for business.
It’s always a good idea to track every single purchase you make for the office. Did you buy office supplies? You may be able to write them off on your taxes. Did you get a new laptop, office chair, or desk? These might also be write-offs. This is a situation where it’s a good idea to have a tax professional help you file. There may be write-offs that you’re not even aware of with your home office setup.
Don’t discount the home office tax credit. You could potentially save thousands on your tax expenses if you’re conducting business entirely from home, which many of us are thanks to the pandemic. Be certain to ask your accountant or tax professional about the home office credit this year when you file!
Saving on your taxes can help bring in a bigger tax return, and who could say no to that? These three tips will help you save money on your taxes with smarter withholdings, utilizing tax breaks for specific types of accounts, and taking advantage of certain tax credits. If you worked from home this year, don’t forget to inquire about the home office deduction. You might be surprised at how much you can save with something so simple. After all, those office expenses add up quickly!