“The difference between death and taxes is death doesn’t get worse every time Congress meets.”
By Will Rogers
Everybody hates paying taxes, but no one can escape it. With the New Year on our doorsteps, it is time to make some final adjustments to lower your tax bill. A proper tax-saver strategy is not possible without a clear understanding of someone’s personal finances. However, it might pay to implement some of the tips in your tax deductibles. It can be difficult to manage an unexpected tax liability and it is best to consider your annual bank statements before filing the 1040 form. Let us find out some important tips for saving money on tax bills.
4 Factors That Can Affect Your Tax Liability
- Buying/Selling Property: Property transactions are complicated and so does their tax deductions. A new homeowner might benefit from property tax deductions along with deductions in mortgage interests. Further, if you are having an in-house office, you can get deductions for repair, maintenance, and utility charges. In short, you can make considerable savings after buying a property. Similarly, if you have sold a house, you might have to pay taxes on the profit and it is best to get professional help for the same.
- Marital status Change: Change in marital status can alleviate your taxes and you might lose on married filing joint tax status to a new single status. Some of the important advantages that you may lose include mortgage interest deductions, non-working spouse deductions, and single tax liabilities. On the contrary, if you have to support dependants, you might even get better savings and turn off your withholdings completely (for lower income individuals.) In case of a new marriage, you need to analyze your joint tax liabilities and it is best to get professional help in the process. Some of the additional benefits of marriage include tax exemption per child ($3,800) and child tax credit that allows you deduct $1,000 per child.
- Newly retired: Retirement can change your tax picture entirely. You can get plenty of deductions in the form of medical and dental expenses. Further, if you have just moved out of your house for a smaller home after living for 5 years or more, you might not have to pay taxes on profits of up to $250,000 for individuals and $500,000 for married couples. In addition to these benefits, elders above 65 years can get standard deductions of $1,250 for single and $1,000 for married couples.
- Change in employment: Have you changed a job recently? If yes, you would need to fill a Form W4 and declare all your exemptions. It might help to project any potential increase or decrease in your earnings before filing taxes. You should get professional advice and align your withholdings according to your new liabilities.
3 Tips to Save Money on Your 2014 Tax Bills
- Accelerate or delay your tax deductions: If you are planning to maximize your deductions this year, it might help to consider your income bracket for the next year. If you are downsizing on your income, it might help to postpone your income to the next year.Delay your income for the next year:
1. Defer your year-end bonuses
2. Postpone distribution receipts from retirement accounts
3. Choose instalment payments in case of capital gain property
Increase your tax deductions this year:
1. Choose early alimony payments
2. Pay medical bills in December for medical expense deductions
3. Make charitable contributions for next year in December
- Maximize retirement contributions: One of the best methods to increase your deductibles is to maximize your retirement contributions ($17,000 annually for individuals below 50 and $22,500 for individuals above 50 years) such as 401(k). These contributions are tax-free until you withdraw the money. In addition to it, you can choose a traditional IRA and take full benefits of tax-free contributions. Roth IRA is another exciting method, which allows you to have tax-free income upon retirement, although you will be required to pay taxes for present contributions.
- Gifts to save money: In addition to your charitable deductions, you can give non-charitable gifts to as many individuals as possible for tax deductions of $14,000 for individuals and $28,000 for married couples. Further, you will not have to pay taxes over any appreciation received by your gifted assets.