We may earn money or products from the companies mentioned in this post.
This is a guest post that was submitted by Linda Richardson, enjoy!
The last tax-filing date in the country was stretched to July 15, 2020. So you’re getting almost 3 and a half months to file your tax returns. This is the best time to ponder how to save money on tax.
Given the present economic situation, each extra penny counts now. Only Jesus knows what will happen after this pandemic is over. The recession has touched the country unofficially, and it’s assumed that thousands of people will lose their jobs. People need to find a side hustle to combat the financial crisis. They need to save money from wherever they can to buy essentials, pay rent, pay off credit card debt, and cover unforeseen expenses. Tax is one sector where people can potentially save a lot of money. So, here we go.
1. Look at your last year’s income tax return:
Take out your last year’s tax returns before submitting your papers this year. Find out what deductions you have claimed in the last financial year. Think about it if you can claim those deductions this year too. Note down all the deductions in a notepad. It won’t let you forget any deductions this year at least.
It’s expected that most people will e-file their tax returns due to the CoronaVirus outbreak. In that case, you have to submit your last year’s income tax returns to validate your previous year’s adjusted gross income. The IRS will go through your last year’s documents and verify the information.
2. Assemble all your important financial documents:
You have more than 3 months in your hand. You have ample time to collect all the essential financial papers that will be required for filing your income tax returns. This includes your W-2, 1099s, and some acknowledgment receipts for getting tax deductions and credits. Collect receipts from charitable organizations where you have donated money. If you have spent money on educational expenses beyond what is reported on the IRS form 1098-T, then you also need to collect those receipts. Do you have any dependents? If so, then make sure you claim tax deductions with valid receipts.
3. Use the Earned Income Tax Credit to save money on tax:
Possibly, one of the most frequently forgotten tax credits in our country, which can help to save almost $6557 in a family with 3 kids. Check if you qualify for the Earned Income Tax Credit this year. The eligibility criterion is usually determined by the income level. Even if your income is above the earned income tax credit mark, then you may also be able to qualify for it if you have suffered a pay cut. This can help you to save money on tax.
There is yet another credit you can apply for. This is called the saver’s credit. You’ll be eligible for it when your income is less than normal. If you have made contributions to the retirement savings account in 2019, then you should take advantage of the saver’s credit.
4. Upgrade your retirement contributions:
With the extension of the income tax return deadline, you have got plenty of time to reduce your taxable income. Usually, you can only contribute up to April 15. But this year is an exception. You can contribute towards the retirement savings fund until July 15. Take advantage of this golden opportunity and contribute towards your IRA savings account. If your age is below 50 years, then you can contribute up to $6000. And, if you’re above 50 years, then you can contribute up to $7000. You can claim a tax deduction on the amount you have contributed.
5. Take advantage of the above-the-line deduction:
Around 90% of the citizens will take the standard deduction this year to save money on tax. And that is completely logical. You can deduct straight $12, 200 as a single taxpayer, which is quite a big amount. The above-the-line deduction helps you lower your gross income and get an adjusted gross income figure. Typical examples of above-the-line deductions include student loan deductions where you can reduce your taxable income by $2500. Next comes the deduction for IRA contributions and the teacher education expense deduction, which can help you save money.
What else can you do?
You can also claim deductions and credits for child care. If you have taken care of a child financially, then you can claim the child and dependent care tax credit up to $2000. Don’t hesitate to claim tax credit even if you have just paid for the summer camp. The IRS allows you to claim a tax credit up to $1050 for one child and $2100 for more than one child.
Do you cover your boyfriend, girlfriend, or a relative’s expenses? If so, then you can claim a tax credit of up to $500 this year. Not a bad figure at all.
Linda Richardson is a financial content writer based in New Jersey and a perennial student with an ongoing interest in learning new things. She uses her curiosity, connected with knowledge as a financial writer, to write about a valuable lesson for small businesses. You can find her on Twitter at @LindaRossie9 and Facebook at @LindaRich008 She is currently a financial writer for http://www.