Sometimes we have to bite the bullet. I mean that we have to pay some of our hard-earned money to Uncle Sam. However, there is a big difference between owing him $5,000 and owing him $500. Here are three ways to reduce the amount you have to produce at tax time:
1. Use as many tax credits as you qualify for. Tax credits are better than deductions. Tax credits lower the amount of money that you will owe to the IRS. There are education tax credits that you can take advantage of if your child is in college. Why not open a Coverdell education savings account? At least $2,000 can be put into an account by you and other family members for use by your child towards educational expenses.
Parents may also opt to use the HOPE tax credit or the Lifetime Learning tax credit. Child and dependent care tax credits can be deducted on a tax return as well. You must have paid these expenses during the calendar year for your child. The earned income tax credit applies to both single and married people in low to medium income homes. They gain more of a credit if they have qualifying dependents, but it is not necessary in order to earn the credit.
2. Use itemized deductions. If you have a home office, care for an elderly relative who lives with you, or have given over and above on your charitable contributions, you may be better off using itemization on your tax return instead of taking the standard deduction. Many don’t take the time to itemize because it is time-consuming. The result could be paying more taxes than you had to.
Sit with a tax accountant and give them rough estimates of your expenses that qualify for itemization. You can lower your taxable income significantly with these deductions. The list of acceptable itemized deductions is long so give it a look. It can’t hurt; it definitely can help you reduce your tax bill.
3. Use our filing status to your advantage. Some people have a choice of filing status. If you are married, you have the option of Filing Jointly or Filing Separately. As a single parent, you may file as Single or as Head of Household. Filing Head of Household or Jointly will give you a larger standard deduction on your tax return. Your filing status gives a clue to your tax exemptions as well. As Head of Household, you can claim yourself and your children. As Married, Filing Jointly, you can do the same thing.
Don’t just accept the bottom line figure and pay taxes each year. Learn about ways to lower that tax bill and get money from Uncle Sam instead of the other way around. Do the research. There are ways to get what we are owed if we take the time to look.