Taxes are one of those things in life that are inevitable. While you will have to go through the process of compiling information and filling out the appropriate forms before you know if you are going to get a refund or owe the IRS come April, there are things you can do to help keep you tax burden as low as possible.
Determine the Correct Filing Status
It is important that you select the appropriate filing status when preparing your returns. Which filing status to choose may seem obvious to some filers, however, that isn't always the case. A change in status during the year may affect how you file, so keep that in mind. For example, If you were married or divorced during the year, you would file based on your marital status on December 31. There are certain exceptions to that rule, however. The IRS offers a tool to help you select the right one from the available options based on your situation.
Weigh Standard Vs. Itemized Deductions
Deductions are dollar amounts that are taken off of your income. Because they lower your adjusted gross income amount, they also reduce how much you will owe in taxes. There are two ways to calculate deductions: Itemizing actual expenses or using the standard deduction. Certain medical expenses, child care costs, charitable contributions and real estate fees may be tax-deductible. If the total of your deductible expenses is greater than the year's standard deduction for your filing status, then you should itemize. If not, the standard deduction is probably a better option.
Take Advantage of Tax Credits
Tax credits are great because they actually reduce your overall tax bill. That is different than deductions, which reduce your income and, in most cases, can result in big savings on how much you owe when April rolls around. There are two basic types of tax credits: refundable and non-refundable. For those that are refundable, you can get a refund for the credit amount even if you have zero tax liability. Tax credits are available for myriad expenses you may have occurred throughout the previous year. These include:
Energy efficiency improvements to your home, including certain HVAC systems and water heaters
Installing renewable energy systems on a home such as buying solar panels or installing a small wind turbine
Higher education expenses for you, your spouse or a dependent
Child or dependent care expenses
Certain retirement contributions (Saver's Credit)
In addition, you may be eligible for other credits that do not require a documented expense. The Child Tax Credit and Earned Income Tax Credit are both examples of this type.
File Your Return on Time
There is no worse feeling than turning in important documents after the deadline. But beyond that sinking feeling, there are also financial consequences. You may face late fees and interest charges, too. The amount will depend on how past due you submit your tax return and whether you were entitled to a refund or you owed money. If you are unable to get a return completed on time, it might be a good idea to file for an extension. Just be sure to pay any estimated taxes with that request. An extension might give you time with the paperwork, but it will not extend the deadline for tax payments.
Keep Accurate Records of Everything
Even if you absolutely dread record keeping, this is one area where you want to do it anyway. If you itemize deductions or claim business expenses for self-employment income you will want to keep documentation for every one of them. Most experts recommend hanging on to those receipts for between five and seven years. If you don't want cumbersome boxes and file folders laying around, try digitizing them instead. That reduces paperwork and makes it easier to keep the files in a safe, secure location.
No one wants to pay more in taxes than necessary. Knowing the correct filing status for your situation, maximizing deductions and tax credits and filing your return in a timely manner can help minimize the amount you owe. Keeping accurate records will help in case there are questions or you face an audit in the future.