Whenever we talk about income tax, most people always have one question, which is; “How can I reduce my income tax?” Most of us want to pay as little tax as possible within the legal limits.
Income tax is something that is both your responsibility and your legal duty. If you don’t pay your income tax on time, it can lead to all sorts of problems. From fines to shutting down your business, or you can even serve jail time in some cases.
Luckily enough, there are things that you can do to help reduce the amount of income tax you pay each year. These things are completely legal and will not affect your responsibilities as a citizen. So read on and find out what you can do to reduce your tax bill today!
This article might also interest you >>> Answers to most frequently asked questions about taxes.
But before we proceed, it would be a great idea to know what income tax actually is.
What is income tax?
Simply put, income tax is the amount of money that the government takes from your wages or salary to improve society.
However, not everyone has to pay income tax. If you’re unemployed, disabled, or retired, you don’t need to pay any income tax (however, you still have to pay council tax).
There are different types of income tax that you could fall under.
If someone employs you, they will deduct your income tax and hand it over to the government. But if you’re self-employed (like a freelancer or small business owner), you’ll need to declare your income tax by yourself.
How can you make sure you pay the right amount of income tax?
If you’ve never paid income tax before, it can be really easy to make a mistake and send too much or too little money. This could lead to hefty fines from the government. So you’ll want to avoid that!
Here are a few tips when making an income tax payment.
1. Homeowner Tax Deduction:
If you own your own house and land, you can deduct your home’s value from your yearly income. It means the higher your mortgage is, the less tax you’ll have to pay! However, this only works as long as you’re still making payments on your mortgage.
The best way to keep track of how much your house is worth is to get an estimate from a local estate agent. Then you can compare this with the value on your mortgage statement. Once you’ve found out which one is higher, use that value for income tax deductions!
2. Make charitable donations:
Suppose you make charitable donations (like to your local animal shelter or homeless person). In that case, you can deduct this amount from your yearly income. Again, the exact figure will depend on where you donate and how much you spend there.
If you don’t spend enough to cover your income tax bill, then that’s fine! You can carry the remainder forward to next year (but remember to keep records of the amount you donated).
3. Consider investing in retirement accounts such as IRAs and 401(k)s:
Put money into retirement accounts like 401(k)s or Individual Retirement Accounts. The government will let you deduct this amount from your yearly income. This works because you won’t be able to withdraw this money until you’re retired!
However, suppose you want a withdrawal before you reach the age of 60. In that case, you’ll be forced to make an early withdrawal penalty (which is usually 10%).
4. Deduct your bad debts:
If you’ve got a business and you make some bad debt, you can deduct these from your yearly income to help reduce the amount of money you owe in taxes. This works because businesses get to deduct their losses from their income.
You can also use this to reduce your income tax bill by deducting any bad debts or losses you’ve made. Make sure to keep all the necessary records and documentation to pay less tax legally.
5. Talk to a tax advisor:
If you still don’t know how to reduce your income tax, then it’s definitely time that you talk to a tax advisor! They’ll be able to tell you exactly how much income tax you owe and which deductions will apply.
Tax advisors or professionals know all the legal stuff and rules that you are unaware of. So the best thing you can do is to talk to them and get things figured out. You will be able to save both time and money if you do.
6. Take advantage of tax breaks for businesses:
Each business is different, and each one offers a range of tax breaks to help reduce your income tax bill.
For example, the government might offer incentives to start up new companies in certain areas (like abandoned industrial zones). They might also provide small business loans or loan guarantees, which will help your business grow and become even more profitable.
7. Keep track of your income and expenses throughout the year:
Keeping track of your income and expenses is the best thing you can do to make sure you pay as little tax as possible. Make it a monthly routine to keep track of the date, time, location, expense type, and all other information possible before you spend money or get paid.
You should organize these expenses in different categories (like business, personal, etc.) so you can see where your money is going. This way, if you need to deduct something, you’ll be able to do it efficiently without making mistakes!
8. Keep an eye on mortgage interest and property taxes:
If you own a house, there are some taxes you can easily deduct from your yearly income. You can write off any amount of mortgage interest that’s over the first $500,000 (or half a million dollars).
This works because it acts as a deduction against your earnings if you’re self-employed or make investment income. However, this does not apply to homebuyers.
9. Pay attention to the deadlines:
Make sure you know all the deadlines for when you have to file your taxes and when they’re due. This is typically April, but it changes depending on where you live.
If you aren’t careful, it’s easy to mess up and pay too many fines in penalties if you miss a deadline or don’t submit something in time.
Five things to consider if you want to pay less income tax
1. Don’t miss out on your tax breaks: Tax rules change all the time, and some of them may be new. You might also qualify for more deductions than you think if you look hard enough.
2. Don’t trust anyone: These days, it’s easy to find a website that offers tax advice but makes sure you’re getting this information from the right person! You don’t want to end up owing the government even more money if you make mistakes with your taxes.
3. Don’t make it too complicated: It’s always better to keep things simple rather than trying to get every last deduction out there. If you claim too many expenses, you might raise some red flags and have the IRS knocking on your door.
4. Don’t be afraid to ask: If you have a question about your taxes, don’t hesitate to ask! The worst thing that can happen is that someone tells you, “I don’t know.” Then at least you’ll have an answer and can move on from there.
5. Don’t forget to review your finances: After you’ve completed your taxes, it’s always a good idea to go over other areas of your finances. If you come across something you want to change or improve, take care of it now while the time is right!
Taxes can be confusing, especially if you have a lot of deductions or think something will cost less than it actually does. However, taxes are your responsibility, so you must not take care of them with caution if you want to pay less.
Work with tax professionals and keep track of everything to make sure you pay what you owe or even less. This is to make sure you get the most out of your taxes. Don’t give too much away to the government in fees. And don’t forget to take care of yourself in the process!