As much as we might all LOVE to wait until April to think about our taxes, the longer we wait, we could be missing out on valuable opportunities to save money. Savvy tax planning begins well before you see those first tax prep commercials start up — complete with smiling, refund-in-hand ladies, just like you!
So, what can you do to reduce the amount you’ll pay to Uncle Sam next year? Here’s a look at five of our favorite hacks to lessen your tax burden before tax season begins.
1. Maximize Your Business Deductions
Guess what? If you drive for Uber or rent your spare bedroom out on Airbnb, you’re a small business owner. Congrats! As far as the IRS is concerned, independent contractors are treated just the same as businesses. And you should rejoice in this designation, especially since the passage of the Tax Cuts and Jobs Act. While that legislation eliminated many employee deductions, your expenses that you incur when doing your job remain fully deductible.
Part of your tax planning strategy to reduce your burden ahead of time should be maximizing those deductions while still growing the value of your business. After all, independent contractors lack the protections employees enjoy regarding health benefits, insurance, and workers’ compensation — but you can save money on taxes by covering these yourself.
Yes, it’s going to take time to track those expenses you incur throughout the year, but it can save you hundreds or even thousands if you’re diligent about tracking your spending. For example, did you upgrade your cell phone to receive customer orders with greater efficiency? What about your laptop? Or perhaps you needed new tires for your car? These expenses are all deductible.
Small business owners, including independent contractors, should always strive to make it to tax day without owing anything. (Because there is nothing worse than owing the government money that you’ve already spent!) This is why reinvesting your money in your business by spending it on qualified expenses throughout the year is a wise way to save on taxes before the season even begins.
Let’s say you rent out a spare room on Airbnb, and you notice that the extra money you brought in last year left you owing money come tax time… If you want to reduce your tax burden for this year, you could deduct the cost of renovations you make to the property to make it more inviting for guests.
The beautiful part? If you later decide that being a vacation rental host isn’t your bag, you get to keep the benefit of those improvements. We call that a win-win!
2. Give to Charity
Another way you can reduce your tax burden well ahead of the season is by donating to charity. People of any age, earning any income level, can write off what they give. If you are a retiree, you can also harness the power of qualified charitable distributions to minimize your adjusted gross income (AGI).
Once you reach age 70 1/2, you must take required minimum distributions (RMDs) from retirement accounts like 401(k)s and IRAs. But you can redirect some of these RMDs to the charity of your choice, and reduce your taxable income. (For 2021, you can redirect up to $100,000)
3. Convert to Solar
Have you considered going green — as in super green, using solar power? If you live in a home and a neighborhood where you’re allowed to make solar modifications to your home, you can go green this year, while also reducing your tax burden. Per current IRS rules, you can enjoy a 26% tax credit if you install your system before the end of 2022. In 2023, the credit drops to 22%, and it expires in 2024 unless Congress renews it. If it’s something you’ve been thinking about recently, and you’ve got the funds for the initial expense, the time is now!
4. Take A Look At Medical Expenses
Finally, there’s good news for people who face crippling medical bills that often make up a substantial portion of their income. Previously, you could only deduct medical expenses that exceeded 10% of your adjusted gross income. This rule recently changed, allowing you to deduct such costs greater than 7.5%. This is excellent news for those of us who have been forced to spend a fortune to stay healthy. And as you’re going through all your receipts, make sure to keep your less common medical deductions in mind when filing. For example, you can deduct the cost of traveling for treatment. In other words, hang onto any receipts for hotel nights spent, or flights taken in pursuit of care.
5. Keep Up With Your Filing Obligations
This one may sound obvious, but we can’t say it often enough: Make sure you always meet your tax deadlines. The IRS charges tax penalties for multiple infractions, which can get pricey quickly, but they’re avoidable — as long as you make paying and filing on time part of your tax strategy. So let this serve as your reminder to set those calendar reminders + automate as much as you can so these important deadlines never take you by surprise.
MORE ON HERMONEY:
- How Your Roth IRA Can Be Your Tax-Exempt Piggy Bank In Retirement
- Is Paying Off Debt The Best Use Of Your Tax Refund?
- 17 Tax Filling Tips for Women Who’ve Had A Life Change
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