Simple Ways to Reduce Your Tax Liability

Tax liability can be something that either stresses the individual out, due to owing a large amount of money, or something that brings joy, in that the tax filer gains money. Texas, as of 2021, was ranked the 9th largest economy in accordance with the gross domestic product (GDP) in the world. Numbers for 2022 have not yet been released, however, at Kurv Business, we estimate that Texas will remain in the highest ranks. With economic responsibility, comes taxes and the way that the state is organized. 

Tax season approaches fast every year. Taxes are ways to rehabilitate roads, pay for new schools and push forth initiatives, however, that doesn’t mean taxpayers should have to pay for all of it. Savings during tax season are possible. Reducing your tax liability is smart and simple, when you have the tools and knowledge available to you.

1. Invest in a retirement account. In investing in this type of account, it reduces your taxable income. Contributions to your retirement account or 401(k), can help lessen tax bills, through the Saver’s credit, formally known as the Retirement Savings Contribution Credit. The amount individuals contribute to the account directly reduces the taxable income they are able to claim by the percentage of the amount donated. 

The credit for 401(k)s range from $1,000 to $2,000 and depends on income as well as how much is contributed to the account yearly. Taxpayers are able to determine credit using a form 8880. Remember to also put the amount contributed on your 1040 tax return to ensure the most savings. 

2. Claim all the deductions and credits you’re eligible for. Claiming deductions and credits can help lower your tax bill significantly due to the amount of money spent on deductions like residence homestead exemptions, and earned income tax credit, a source of income applicable to individuals with “low to moderate income”. 

Earned income tax credit is available to families or individuals who make less than $57,500 in 2021. The amount depends on factors such as marital status, amount earned throughout the year and if you have children. In order to qualify, you must file a federal income tax return as well as meet guidelines listed above. 

3. Choose the right type of insurance plan. With the right type of insurance, you are able to save money through your tax return. If you are self-employed, your health insurance gives you the option of it becoming tax deductible due to being able to write-off health insurance premiums. 

Any premiums paid with money received after tax dollars are deductive. Intuit Turbotax gives a great example of this and says that if an individual,”purchased insurance on your own through a health insurance exchange or directly from an insurance company, the money you paid toward your monthly premiums can be taken as a tax deduction”. 

If your employer pays for your health insurance, yet you pay for a portion of it, you may qualify for deductions in regards to the amount of money you pay out of pocket. Remember, however, there are limitations in regards to how much is able to be written off.

The general rule for writing off health insurance is as follows: premium payments, as well as payments in general, must exceed 7.5% of the adjusted gross income provided. If self employed, however, you do not have to be at 7.5%, due to writing them off as adjustments to the income provided, not tax deductions. 

4. Make charitable contributions. If you’ve donated up to or more than $300 to charity, you are able to write it down as a deduction. Married individuals who are filing jointly are able to claim up to $600 of charitable contributions. 

Limits in claiming charitable contributions vary. They, however, include donating from the range from 20% to 60% of adjusted gross income (AGI). It also depends upon the type of contribution, whether it be monetary, property or otherwise, as well as the type of organization donated to. 

Claiming a donation lowers the adjusted gross income (AGI) and taxable income, in turn, aiding in savings to those who have donated to authorized charities. All donations given to charity trusts, as well as, donations made to supporting organizations do not count and are not allowed to be claimed as a write-off and deduction. 

5. Stay organized and keep good records. We learn the lesson of staying organized at the very beginning of our lives, starting in school. Teachers show us how to plan, arrange and function in an operational manner. Doing what you’ve learned in school, when handling taxes will make it easier to file your taxes and ensure that you don’t miss any deductions or credits offered to you and your situation. 

We recommend staying organized through keeping W2s and other important documents in a file, at a place that is safe and easily accessible. We also recommend keeping copies of receipts on a safe system and a spreadsheet for charitable donations, as well as labeling all receipts for future use. If you have questions or concerns about filing your taxes, we always push for our clientele to partner with an accountant or certified tax professional if you have questions or concerns about filing your taxes. 

Getting ready for tax season is simple and straightforward when you set yourself up for success. Ways to do so include keeping up to date with ways to complete deductions, staying on top of important documents, like receipts as well as organizing your charitable donations and W2s. Reach out to Kurv Business if you’re looking for or are in need of aid in regards to staying organized with taxes through our bookkeeping services, tax services and marketing service.