So, tax season is close! Uncle Sam’s knocking at the door… Stressed? No worries. We’re here. If you’ve settled down to figure out what you owe Uncle Sam, take a load off your mind! Let us help you prepare your taxes without breaking out in hives. We will tell you how to save money on debt. “Save the Tax day (April 15th) to your calendar first and start planning for your payment in advance. If you cannot file your tax returns within the filing deadline date, you may have to pay a heavy penalty. So better late than never.” So let get you out of debt and provide you some tips to be debt free.
Step 1: Gather your Tax Records To Save Money On Tax
Firstly, before you file your taxes, gather all copies of your tax documents and returns for at least three years to calculate your tax liability. So, here’s a quick list of documents that you will require to get started:
- 1040 – U.S. Individual Income Tax Return
- Previous year’s tax return
- Mortgage Interest Statement
- Investment Income Statements
Firstly, whether you are preparing your tax return on your own or seeing a tax professional, make sure you compare your current year’s tax return to your previous ones and verify all the taxes deducted from your income. So, If you are due for a refund or owe a tax debt for any previous year, use the IRS online tool to find out your payoff amount and check for your payments made in the last 18 months.
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Step 2: Deductions and Exemptions To get out debt
While filing your taxes, itemized or standard deductions can go a long way in reducing your taxable income. They can lower the amount of taxes you owe, which means your tax bill curtails and you save big bucks from Uncle Sam. You can opt for either. The standard deduction amount for 2019 tax year for single filers is $12,200 and $24,400 for married couples filing jointly. However, in 2020, raised to $12,400 for single taxpayers and $24,800 for married filers. Most of the U.S taxpayers take the standard deduction while filing tax returns. But then, it’s better off itemizing if you can spend a little time gathering some of your old receipts for deductible expenses. Itemized deduction is a great option for taxpayers with high-income. If you plan to choose itemized deductions for filing, look for the back-up of receipts you have for:
- Charitable Donations
- Medical Expenses
- Health Insurance Premiums
- Home Mortgage Interest and Points
- Childcare Costs
- Education Costs Deductible taxes
- Casualty and theft losses
- Business travel expenses
- Bank and credit card statements
- Miscellaneous tax deductions (un-reimbursed business expenses, moving expenses etc.)
Step 3: Tax Credits
Tax credits are way favourable than tax deductions and exemptions as they reduce the overall tax liability, i.e. the amount of taxes you owe, and not just the taxable income. It is a dollar-for-dollar reduction of your tax bill. That means, if you owe a maximum of $100 in taxes but are eligible for $100 tax credit, your net liability stands zero. Tax credits primarily benefit the low and mid-income earning taxpayers.
Tax credits are of two types: refundable and non-refundable. You get a refund in a refundable tax credit even if it is more than the amount you owe, so if you owe $350 in taxes but qualify for a $1,000 credit, you’ll get a refund for $650. However, in non-refundable tax credit, you get a refund only up to the amount you owe. Most tax credits aren’t refundable. Here’s a list of tax credits for individuals and businesses.
- Child Tax Credit
- Child and Dependent Care Credit
- Earned Income Tax Credit
- Adoption Credit
- Lifetime Learning Credit
- American Opportunity Credit
- Saver’s Credit
- Residential Energy Tax Credit
- Plug-in Electric-Drive Motor Vehicle Credit
Step 4: Filing Status To Save Money On Tax
Your filing status determines the tax return form you will use while filing your taxes, the standard deduction rates applicable, credits you are eligible for and the amount you’ll owe in taxes for the tax year. So, how do you determine your income tax filing status?
There are five categories of filing status to consider for federal income tax purposes. So, your marital status is a key factor influencing your filing status. Let’s have a look at the rundown of the five statuses:
If you are unmarried or legally separated or divorced on the last day of the year.
Head of Household
To qualify for Head of Household status, you must meet the following criteria:
If you are unmarried on the last day of the year.
If you have been living apart from your spouse and paid over 50% of the cost of keeping up a home for a dependent for more than half of the year.
Married Filing Jointly
If you are married by the end of the tax year and both you and your spouse agree to file a tax return jointly.
Married Filing Separately
If you are married and both you and your spouse file separate tax returns and be responsible only for your own tax.
Qualifying Widow(er) with Dependent Child
If you are unmarried during the initial year of your spouse’s death and have a dependent child, you can file as a Qualifying Widow(er) for the two tax years following the year of the deceased spouse.
Be sure to figure out the right tax filing status for you while filing your returns; one mistake can affect your tax bill and give it an instant push up.
Step 5: File Your Taxes
So, once you’re done with the collection and verification of your documents, you are all set to file your taxes! You can choose to hire a tax professional to help you file your tax returns online or use our recommended tax software or can file on paper and send your tax forms to Uncle Sam by mail.
The Bottom Line- To get out of debt
In this article, we tell you how to save money on debt. So, It’s time to review your financial abilities and get your papers organized. Don’t wait until the last minute. Whether you do your taxes by yourself or hire a professional, the earlier you file, the sooner you’ll have it processed. Therefore, make smart choices and a little change to debt free life. We hope our tips help you get out of debts.
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