The thick of the tax season is upon us – which may not matter to the more than eight million people, who fail to file their taxes on time every year, according to the Internal Revenue Service. Even worse, some people are unaware of the consequences of filing late. Essentially, strategy zero should be: Don’t forget to file your taxes.
Now, when you begin the process of filing, these six tax strategies may help you maximize your returns:
Contribute to a SEP, IRA or Roth IRA
A SEP IRA or traditional IRA contribution reduces your current tax liability. However, if you or your spouse participates in a retirement plan at work, your eligibility to contribute to a traditional IRA may be limited. To make a SEP contribution, you need to be self-employed.
Most people overlook the chance to get additional funds in their Roth bucket. This could be a great opportunity to reduce your current tax liability.
Whether you’re filing your taxes as single or married, the contribution to a Roth IRA is limited by modified adjusted gross income (MAGI). But if you’re 50 or older, you may also make an extra “catch-up” contribution.
Gather receipts for charitable contributions
When filing your taxes, make sure not to leave out any charitable donations made during the year. You can reduce your taxable income by itemizing your deductions, cash and property donations to eligible charities.
With regards to cash donations, it’s important to keep the receipts for proof. You also need an appraisal of value from the charity for donated property. The documents come in handy when the regulator wants to confirm the donations made.
Report any cryptocurrency position or foreign bank account
Taxpayers who hold crypto assets such as Bitcoin, Ethereum and other cryptocurrencies may have to pay taxes on them when filing their tax returns. When preparing your tax documents, you should declare them as capital gains or losses.
Foreign bank accounts and financial assets must also be declared. Failure to do so may bring hefty fines, penalties or even jail time. You don’t want to be on the wrong side of the law.
Check your filing status
It may sound like a no-brainer, but it’s essential to confirm your filing status before filing your taxes. Are you single or married filing jointly, married filing separately or head of household?
For most taxpayers, this is straightforward. However, some life events like death of a spouse, divorce or one partner living away from the other can influence how much tax you owe. You should understand the different filing statuses and their various qualifications to know which suits your situation.
Deduct investment interest expense
Any amount of interest that is paid on loan proceeds and used to purchase investments or securities is considered an investment interest expense and, in certain circumstances, can be tax deductible. These investment interest expenses include interest on a loan used to buy property held for investment and margin interest used to leverage securities in a brokerage account.
As previously stated, investment interest expense is tax deductible, but not when used for passive ventures, like investing in a business a taxpayer owns but doesn’t actively manage. The deductible is also limited to the amount of investment income received. Also, if an investment is held for personal and business gain, any income received needs to be allocated proportionally between them.
Remember, personal investment interest expense is reported on Schedule A of your 1040 tax form.
Check if you’re eligible for credits
Tax credits are a great way to reduce the amount of taxes you owe, but most taxpayers miss out on them because they lack awareness of their existence, or they simply don’t think about it.
The most common credit sources include energy-efficient home improvements, electric vehicles and education credits. Did you purchase an energy-efficient home improvement product like a heat pump, water boiler or certain windows? If so, you should consider the credit you can claim.
The same goes for electric vehicles. Check if your car qualifies for the electronic vehicle credit. However, specific vehicle standards and income thresholds must be met to qualify for such incentives. For instance, married filing jointly is a $300,000 threshold, but for single filers, it’s $150,000.
Education credits like the American Opportunity Tax Credit and Lifetime Learning Credit are also important. You can use the 1098 tuition form or other documents to support your eligibility for the education credits.
It pays to take all available credits and deductions into account when filing your taxes. Doing so can significantly reduce how much you owe in taxes or increase the amount you receive back during tax season. Find out any credits you may qualify for and check if there are any application deadlines.
Ben Soccodato and Chris Kampitsis lead The SKG Team at the Barnum Financial Group of CFPs (Certified Financial Planners) and CExPs (Certified Exit Planners), whose Northeast offices include locations in Elmsford, Stamford and Shelton.
