We all like the idea of saving money come tax time, but tax tips seem to only come at the end of the year, when everyone is scrambling to get a few more tax deductions before the year ends.
We’re going to change it up a little and provide five tips you can do right now that should make life easier come tax time.
While you don’t want to do anything illegal to avoid paying taxes, there is also no reason to pay more than you owe. With a little planning and TurboTax help, it’s possible to save money on your taxes.
1. Plan Ahead
One of the best things you can do when it comes to tax planning is to look ahead. What expenses will you have for the year? What items can result in tax credits and deductions?
By looking ahead, you can get a solid idea of what you are eligible for, and then plan your expenditures accordingly. It makes sense to be prepared, rather than try desperately to find last-minute tax savings.
Are there charities you want to support but don’t have the cash on hand? Start saving today with the goal of making the contribution in December. You can take a tax deduction for charitable contributions to an IRS-recognized nonprofit organization if you can itemize your tax deductions, even if you make your donation on December 31!
Are you self-employed and thinking about purchasing that office equipment you’ve been procrastinating purchasing? Start saving now! You can also purchase that equipment on December 31 and still take a business expense deduction on your taxes.
What about making an extra mortgage payment (paying the January bill in December, thus taking the interest deduction this year)? These are all things that cost money, and instead of throwing it on a credit card, it’s great to make a plan and begin saving as soon as possible.
2. Should You Be Itemizing Your Tax Deductions
For many taxpayers, itemizing tax deductions can be a way to reduce taxable income.
Itemization works when you have a number of tax deductions that qualify as itemized deductions that add up to more than the standard deduction ($12,400 single for tax year 2020, $12,550 tax year 2021, $18,650 head of household tax year 2020, $18,800 tax year 2021, $24,800 married filing jointly tax year 2020, $25,100 tax year 2021) that all taxpayers get.
Some eligible tax deductions include charitable contributions, mortgage interest, property taxes and a portion of medical expenses over a certain amount of your income.
TurboTax will help you decide which is more beneficial for you (the standard deduction or itemized deductions) based on your entries, but it’s helpful to start thinking about the tax deductions you may have now.
Start accumulating those receipts and amounts today so that you can save more money and have your information ready to go when you file your taxes.
3. Keep Good Records
When it comes to taxes, it helps to have your records all in one place so you don’t miss any tax deductions or credits. By keeping good records now, even if you haven’t in the past, you can save time at tax time.
You also should keep information related to any tax deductions and credits you are claiming at tax-time.
4. Strategically Sell Your Investments
If you have investments that you want to sell, make sure you go about it in a strategic manner. When you sell an investment for a gain, remember you can reduce the amount that you have to pay in capital gains taxes by offsetting your gains with capital losses. If you have some losing investments that you want to get rid of, you can sell them and deduct the losses. You can use our Capital Gains Tax Calculator to estimate your capital gains/losses, capital gains tax, and compare short term vs. long-term capital gain if you’ve already sold or are considering selling.
Finally, consider donating appreciated stock instead of cashing it out if your financial situation permits. When you donate appreciated stock directly to an IRS recognized 501(c)(3) charitable organization, you can take a deduction for the fair market value of the donated stock and avoid the capital gains tax you would have paid if you would have sold the stock and then donated the proceeds if you can itemize your tax deductions.
5. Be Aware of Tax Benefits for Your Kids
If you took your kids to summer camp or even sports camp so you could work, all is not lost. Camps are expensive but you can take the Child and Dependent Care Credit worth up to $1,050 for one child and worth up to $2,100 for two or more children under 13 and no age limit if they are disabled. For the tax year 2021 only, the Child and Dependent Care Credit amount increased and is worth up to $4,000 for one child and worth up to $8,000 for two or more children under 13 and no age limit if they are disable. Also for tax year 2021, the credit is fully refundable which means unlike previous years you can get the credit even if you don’t owe any taxes. There are also other tax benefits when you have dependent kids, like the Earned Income Tax Credit worth up to $6,660 in 2020 ($6,728 in 2021) for three or more kids.
Starting in 2021 (the taxes you file in 2022) the Child Tax Credit increases from $2,000 to up to $3,600 for each qualifying child under 6 and up to $3,000 for each qualifying child age 6 to 17.
TurboTax Has You Covered
Don’t worry about knowing these tax laws. TurboTax will ask you simple questions about you and give you the tax deductions and credits you’re eligible for based on your answers. If you have questions, you can connect live via one-way video to a TurboTax Live tax expert with an average 12 years experience to get your tax questions answered. TurboTax tax experts are available in English and Spanish, year-round and can review, sign, and file your tax return or you can even fully hand your taxes over to them. All from the comfort of your home.