The average American is entitled to many tax benefits, including the right to itemize deductions. Most salaried employees, on a W-2 tax basis, can also pool itemized deductions to reduce their taxable income. However, some of these benefits are not available to all taxpayers. In this article, we’ll take a closer look at some of the most common and beneficial tax breaks available to ordinary Americans.
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Contribute to a Retirement Account
Contributing to an IRA may reduce your taxable income, but it has certain restrictions. For example, if you are self-employed, you must contribute at least a quarter of your compensation to the account. The deduction from your adjusted gross income is capped at $24,000 for 2018. This means that if you are self-employed, you will have to contribute more than half of your compensation to get the full deduction. If you are self-employed, you must also pay a tax penalty of 10% for withdrawing from the account before age 59 1/2.
IRAs offer many benefits. You can contribute up to $6,000 a year if you are under 50. If you are over 50, you can contribute an additional six hundred dollars. The money you contribute is tax-deferred, so it can grow over time, and your potential earnings grow tax-deferred, too. In retirement, you can withdraw the funds without paying tax. However, if you are still working, you may need to contribute more if you are going to get a higher tax refund.
Open a Health Savings Account
If you’re in the process of opening a health care plan, you may be wondering how to open a Health Savings Account (HSA). The good news is that you can do both. First of all, HSAs are a great way to save money on medical expenses. You can use the funds to pay for a variety of qualifying expenses. These include prescription drugs, doctor visits, and even mental health and addiction treatment. Plus, you can use your HSA funds for dental, vision, or long-term care insurance premiums. The best part? HSA funds are portable and do not have a use-it-or-lose-it deadline.
Another great reason to open an HSA is the tax advantage. HSA deposits are tax-deductible for the previous year. As long as you combine an HSA with a high-deductible health plan, your tax savings can be significant. The premiums for HSAs are typically lower than those for typical PPO plans. You could save up to $5,000 a year. The savings can add up quickly, so opening a HSA today is the best way to start saving for medical expenses.
Check for Flexible Spending Accounts at Work
A flexible spending account (FSA) is a way to set aside pretax dollars for medical expenses. You can use these funds to cover the cost of prescriptions, over-the-counter medications, and even vision correction. You can even use them to pay for things such as face wash and pain killers. While you can save a significant amount of money through an FSA, the main benefit of these accounts is that they reduce your tax burden.
To use your FSA, you must first enroll in a health plan through your employer. Once you are enrolled, your employer will deduct the amount you have to contribute annually, pre-tax. FSA funds are available to you from the first day of the plan year, so make sure to take advantage of early access to your money. Review the open enrollment materials and make sure you are eligible for an FSA. Be careful, though, because you can’t use your FSA funds for the same expense twice.
FSAs can help you reduce your taxes, and the money you save may be used to pay for medical expenses, including vision care and dental care. The funds in your FSA can even be used for dependent daycare. There are many ways to take advantage of an FSA, and one of the easiest is to take advantage of your current employer’s plan. You can also find out if your employer offers an FSA at your place of work.
Use Your Side Hustle to Claim Business Deductions
If you’re launching a side hustle, you can still use it to reduce your taxes by claiming business deductions. You can detail business expenses and income on Schedule C. Entrepreneurs benefit most from this type of tax code, because they pay taxes on their net income, which is equal to their income less expenses. Even if your side hustle only generates a small amount of money, it can make a significant impact on your tax bill.
Keeping meticulous records is crucial when you’re claiming business deductions. It’s not difficult to keep track of expenses and record them in an Excel spreadsheet or cloud-based accounting software. Moreover, you can use a budgeting software, such as Mint, to keep track of business expenses and income. Using a record-keeping system for your side hustle will simplify the task of filing taxes and help you track your side gig’s earnings and expenses.
Claim a Home Office Deduction
If you own a home office for your business, you may be eligible to claim a Home Office Deduction to lower your taxes. This deduction reduces your adjusted gross income (AGI), making you eligible to claim many different tax benefits. In addition to reducing your AGI, you may also qualify to deduct certain expenses, such as medical expenses and miscellaneous itemized deductions. This deduction is based on a method known as depreciation, which recovers the cost of an asset over its useful life.
To claim a Home Office Deduction, you must have a room or space that is used exclusively for your business. The room must be a dedicated space, not an extra bedroom or living room that you use for work purposes. A separate room should be used only for work purposes and not for any other activities, such as sleeping. You should also maintain detailed records of expenses and receipts for the first two years of your business’ operations.
Rent Out Your Home for Business Meetings
Did you know that you can rent out your home for business meetings? The IRS allows you to deduct the rental costs as a business expense under IRC 280A(g). Unless the meeting is for entertainment purposes, the business meeting can’t last more than 15 days. However, you can use your home for these meetings if you’re a small business owner. Here are a few tips for doing so.
To qualify for this deduction, you should rent out your home only when necessary for your business. If you don’t use the rental for entertaining parties, the business cannot claim a tax deduction. If the meeting is strictly for business, the deduction doesn’t apply. You can also use the rental days as part of your income plan. Ultimately, you’ll end up saving money and reducing your taxes.
Get a Credit for Higher Education
You can claim the Education Expense Credit on your federal tax return if you’ve paid for post-secondary education. The credit covers the first $2,000 of qualified expenses, up to a maximum of $2,000 per year. You’re also eligible to claim the credit on certain fellowships and scholarships if they cover all or part of the costs of your education. The only stipulation is that you must be enrolled at least half-time for the tax year in which you claim the credit.
The credit can help you pay for your tuition and related expenses for four years of college or higher education. It’s worth noting that the credit is only good for the first four years of higher education. You can also claim the credit for any amount you’ve spent on a recognized educational credential or on improving your job skills. In many cases, this credit can reduce your tax liability to zero. In addition, if you have additional education expenses, you can claim them for a lifetime learning credit that is up to $2,000 and refundable.
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