Getting that paycheck after all your hard work and effort is the best feeling ever. However, an unexpected tax bill can spill water on the joy of your hard-earned money. The good news is that there are a bunch of effective ways which you can utilize to save your tax expenses.
Here’s how you can save on your taxes in 2022 as per the latest tax law updates.
Home Office Deductions
The COVID-19 pandemic has shifted many of us towards the home office. While this may be a challenge, it certainly comes as a benefit for you in terms of tax payment.
If you own a side business then feel free to claim tax deductions on your home office. The portion of your home that you use regularly for home office purposes is subjected to tax deductions. As it covers 1/5th of your apartment’s living space, you can deduct 1/5th of rent and utility fees.
Business Deductions for Self-Employed Individuals
Whether or not you are a full-time or part-time self-employed individual, you are qualified for tax deductions. In addition to that, freelancers or rideshare drivers are at the benefit of claiming business deductions on their income.
You can avail of business tax deductions on business transport, home internet fees, website fees, advertisements, office supplies, professional publications, and any expenses relevant to running your business.
Contributing to a retirement account is an effective strategy to lessen taxable income.
The traditional 401(k) account is one of the most popular means in this aspect. You can store up to $19,500 per year for 2021. Moreover, if your age is 50 or above, you are eligible to save an additional $ 6500 for both 2021 and 2022. In this case, the limit of putting into an IRA account is $ 7000 per year.
Apart from that, the traditional IRA accounts also hold the great scope to reduce your taxes. If you and your spouse are covered by a retirement plan, there are opportunities for you to deduct your taxes to some extent. In this case, you must. Besides, the tax filing deadline to file your IRA from the previous tax year gives you extra time. Hence, utilize this extra time to your benefit.
Fund your Flexible Spending Accounts
If your employer offers flexible spending accounts, you can easily pay your medical expenses with tax-free dollars. Every year the IRS allows you to funnel your tax-free dollars directly from your paycheck to your Flexible Spending Account. The limitation of saving into the FSA account has amounted to $2,750 in filing 2021.
Note that, you will be required to use the money during the calendar year for medical and dental expenses. Your money may be forfeited if not used by the end of the year.
Start a Health Savings Account
Health Savings Account is an immensely helpful alternative to medical plans in lowering taxable income.
Medical facilities are our basic needs. Thus, contributions to the health savings account enable an immediate tax deduction, tax-deferred, and tax-free withdrawal for necessary medical expenses.
Write off on Business Travel Expenses
Your business trip is a part of your profession which is excluded from any vacation expense. Hence, you can reduce your tax expenses from your business travels. As you go on a business trip, you may incur various expenses. Flight expenses, hotel bills, and many such business-relevant expenses are a tax write-off for you
Credits on Higher Education
Higher education expenses are quite expensive, as we all know. Tax bills on education can increase the difficulty. Nevertheless, there are scopes to reduce tax expense on it.
Tax credits are offered by the government which can reduce the cost of your education. You can claim the American Opportunity Tax Credit for the first 4 years of your education. It allows a maximum credit of $2,500 per student per year. In terms of credit, the amount is deducted from whatever tax you owe to the government. If it exceeds, $1,000 may be refundable to you.
Besides, if you are up for improving your job skills, the lifetime learning credit will be effective for you. It’s worth up to $ 2000. This will reduce your education expense and gear you up for career challenges.
Credits on Higher Education
The Earned Income Tax Credit (EITC) can be of great advantage for the low and moderate-income group of workers. It takes your income, marital status, and family size to assess if you qualify for it. Notably, the income limit for single taxpayers with no children is $ 21,430 and for married couples with 3 or more children, the limit is $57,414. This system contains the tax credit system which entails a dollar-to-dollar reduction corresponding to your actual bill. Therefore, you might qualify for a tax credit of up to $ 7000.
Charity and Donation
Charitable contributions and donations are all deductible. You can donate cash, clothes, food, or household items. All these donations can lessen your tax expense. All you need to do is itemize your donations to claim your tax deduction. Nevertheless, there are scopes for non-itemized deductions too. The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, allows taxpayers who do not itemize upto $ 300. Recently, there are many tax software programs which come with modules that estimate the value of each item you donate.
Dependent Care Credit
Tax expense reduction is evident for parents through the Dependent Care Credit. If you have one or more children, then you can write-off tax on expenses relevant to your child. This includes: day care, babysitters or related transportation expenses. For parents with single children, the child and dependent care credit has been increased to $ 8000. On the other hand, for parents with multiple children, the credit has been expanded to $ 16,000. Keep in mind that you must keep your receipts and other monetary proof to strengthen your claim on tax return
Self Employed Sick Leave and Family Credit:
According to the Families First Coronavirus Response Act, a self-employed individual is subjected to tax write-off for sick leave. Fill up Form 7202 and avail yourself of the sick and family leave credit based on the sick leave or family leave equivalent to the tax credit. Notably, this form is eligible for individuals who were unable to work or had to look after the covid infected family member.
Now that you know all the effective ways to recoup your tax expenses; you will be able to easily save a substantial portion of your savings. For further assistance contact Ahad Ali CPA, your reliable tax professional and licensed CPA dedicated to providing seamless tax and accounting services.