When it comes to filing your taxes, you might prefer to get it over and done with as quickly as possible. But if you're not thorough, you could miss out on commonly overlooked tax deductions. For example, are you aware of the Saver's Credit? If not, it is no surprise: Only 21percent of American workers who earn less than $50,000 are aware of this credit. And yet these are the people who this credit will benefit most. Basically, if you contribute to a qualified retirement account such as a 401k or IRA, you can get a credit of up to $1,000 ($2,000 if married filing jointly) off your taxes.
What other credits and deductions might you be missing? Here are some ways to save on your taxes this year:
1. Adjust your withholdings. Receiving a large tax refund check each year may seem like a benefit. However, you are merely receiving back money that could have been used throughout the year.
Instead of allowing the government to hold your hard-earned dollars until tax time, a better alternative is to adjust your withholdings on your W-2 to receive more money from your paycheck throughout the year. This way, you'll have more cash in your pocket to pay down debt or save for retirement. To do this, you just need to complete a new W-2 form with your employer.
2. Make charitable donations. To earn tax deductions and help those in need, consider donating goods that you no longer use. From clothes and old toys, to electronics, books, and furniture, there are a multitude of donations you can deduct.
Keep an accurate list of what you donate throughout the year. Remember that any donation worth more than $250 will require a receipt, and there are limits if you donate more than 20 percent of your adjusted gross income. Consult the IRS website for a complete list of deduction limitations, as well as to check if the organization you're donating to is approved by the IRS.
3. Start saving for retirement. If you have nothing set aside for retirement at the moment, now is a great time to start. Contributions to an employer-based 401(k) plan are made pre-tax, and, depending on your level of income, you can write off what you contribute to a traditional IRA. If you decide to go with a Roth IRA, contributions are not tax-deductible, but will grow tax-free.
If you already have a modest portfolio in place, consider increasing your contributions. Your ultimate goal should be to contribute the maximum allowed for any of these options.
4. Go green. There are a variety of green energy tax credits available. If you install alternative energy equipment in your home, such as solar electric systems or solar hot water heaters, you can usually receive a tax credit for 30 percent of what you paid, and the $2,000 cap on this credit was recently lifted. Credits worth up to $7,500 for electric automobiles are also available.
5. Keep accurate records. If you've always used the 1040EZ form and taken the standard deduction, it might be time to look into itemizing your deductions. If your itemized deductions total more than the standard, you'll receive a bigger return. However, to do this, you'll need to keep accurate records throughout the year, which will include, among other things, receipts and documents related to non-reimbursed job-related expenses, job search expenses, charitable donations, and non-reimbursed medical expenses. pIn addition to allowing you to itemize your expenses, tracking these items throughout the year can also save you time when you prepare your return.
In addition to following these tips, be sure that you are taking advantage of every available deduction. There are plenty of lesser-known deductions and credits that many Americans miss out on, such as child care expenses, job relocation expenses, tax preparation fees, and many more for small business owners and the self-employed. Be sure to research these and any other expenditures in your life that you think you might qualify for.
What other ways can you think of to save on taxes?
David Bakke writes about money, finances, and taxes on Money Crashers, an online resource for budgeting, getting out of debt, and building long-term wealth.
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