To say that an ounce of prevention is worth a pound of cure is a gross understatement when it comes to taxes and avoiding a tax bill.
You CAN automate your preventive steps and reduce your tax stress! It’s a lot easier than you thought, and I’ll provide you with some basic tips in this post on how you can do this.
Several small adjustments can prevent you from having tax bills.
Here are a few ideas for avoiding a tax bill:
–Learn which deduction category is best for you. There are two types of deductions: standard and itemized. Standard deductions are the amounts set by Congress, which determines the income that is excluded from the tax calculation. Itemized deductions are an alternative that allows a person to use other expenses to calculate the deduction amount. If you pay mortgage interest, have a lot of medical expenses, contribute generously to charity, or have a home office that you use for your job, then itemizing your deductions may be more advantageous than taking the standard deduction rate. IRS has a list of all of the things that can be included as itemized deductions. Check this list to see which deduction category is best for you.
–Go back to school. There are tax credits and/or income reductions available to folks that pay for college. Normally, you can get a student loan for the expenses, but it’s better to pay as much as you can out of pocket (that way, you don’t create a new bill). If you want more information about education tax benefits, IRS’s website features an entire section that explore all of the benefits of obtaining an education. Aside from the tax benefit, getting an education could open the door to better job opportunities and
more income to be taxed– uhm, I mean, more money to accomplish your goals.
–Open a small business. Small businesses can generate income, but, during lean years, can reduce taxable income. The tax benefits of opening a business include being able to write off business related travel, tools, equipment, qualified training, and even the cost of licensure. The point is to always retain a business purpose: you must remain within IRS’s guidelines. IRS has a whole section on small business, as well. If you decide to cheat a little on your taxes, you may find yourself as the recipient of a very unpleasant audit (as former auditor, I can tell you that you DO NOT want this experience)!
–Change your W-4. This was briefly mentioned in Part 2 (under planning refunds for subsequent years via increased tax withholdings). Withholdings generally work in the following way: you do the W-4 worksheet and it will come up with a number between zero (0) and ten (10). After that, you put the number on your W-4 form, turn it in to your employer, and that determines how your withholding is calculated. However, if you really want to prevent from having a huge tax bill, you will either reduce that number (if you calculate 5 on the worksheet, put 3 on the form that you submit to your employer) or indicate that you want additional money held out of each check. You are not legally required to use the number calculated on the worksheet, but you are required to reasonably estimate your tax (don’t put down “10” on the form when your worksheet calculated “2”). This is a less drastic way to prevent tax liability, since this involves smaller payments toward the tax.
That concludes the Beating Tax Debt series! I hope you al have enjoyed the information as much as I’ve enjoyed putting this together for you. If you have tax questions or comments, please feel free to comment below. Also, if you don’t already, be sure to follow me on Facebook, Twitter, and Instagram. I’ll talk to you all soon!