Many people don’t realize that tax time also represents a great opportunity to enhance your personal earning power. Working smarter can mean eliminating taxes when preparing your taxes this fall.
Here are some effective tax strategies that may have you earning more money, saving more tax dollars or lessening the burden on your bank account this year:
Generate more income, without increasing your taxes
One way to earn extra income this year is to accept a job offer without worrying about paying a fee. If you find yourself accepting these offers, be aware that you may have to withhold part of your current income before it is deposited into your bank account.
In addition, the due date for your federal taxes could overlap with or be a couple weeks later than your current pay, as many businesses offer tax-free pay for part-time employees. So you may need to receive your check soon after work.
Calculate deductions for the full year and file your taxes by Dec. 31
If you have additional income for 2018, maximize it. For example, if you earn $100,000 per year and only pay $50,000 in taxes, your savings per year on tax is $50,000. Now you’re making $35,000 and able to deduct $45,000 toward your tax bill.
It can be a savvy move for salaried or independent contractors to deduct self-employment expenses year-round. The self-employment tax comes out of your gross income, which may be greater than your net income. These expenses include things like health insurance premiums, security deposits for a new office and even moving expenses. Most importantly, you don’t want to take a deduction during tax time; you want to be able to deduct these expenses year-round.
Note that don’t deduct more than you need to. Deducting more than you need means that more income could be subject to taxes in 2019, and more taxes on your income.
Consider a refundable tax credit
Income generated from a job, a summer job and outside income may make you eligible for a refundable tax credit. The refundable tax credit is what reduces the amount of tax paid from your gross income and then sends it back to you.
Even if you’re not expecting a refund, it is a strategy that may make sense, depending on what other forms of income you have.
Increase taxable interest income
To maximize your income and reduce tax, consider investing in a Roth IRA. A Roth IRA allows you to receive an upfront tax deduction (up to $5,500 in 2019), but then all withdrawals from your account are tax-free. That results in an even greater tax deduction. In addition, contributions made to a Roth IRA can be withdrawn at any time without penalty, with all the tax-free benefits of your investment.
While the Roth IRA still requires you to pay income tax on withdrawals from the account when you reach age 59½, the results are better than a standard IRA. In fact, in many cases, a Roth IRA is an optimal choice because you receive a greater refund from the tax deduction on the contribution.
Furthermore, in order to qualify for a deduction to deduct contributions to a Roth IRA, you must be subject to any gift tax. For all tax year 2018 contributions, you will be subject to an income-tax rate of 0 percent (with a 10 percent limit).
Self-employment income can also be taxable. By contributing to an LLC, you can deduct the amount that is earned within the LLC (as long as the LLC earns no profit in a given year) as a separate line item on your tax return.