How to Reduce Your Tax Burden

Although the tax deadline isn’t until April 15, some people have been thinking about taxes all year long and making moves to reduce their taxable income. Throughout the year, taxpayers can reduce their income in a number of ways, such as:

• Donating to charity
• Contributing to defined contribution retirement accounts
• Gifting money to relatives

These moves reduce your income so that when it’s time to file taxes, your tax burden has decreased. However, if you haven’t bothered to think about taxes until just now, you can still take advantage of tax credits and tax deductions. Although they can be easily confused, credits and deductions do very different things.

Like those moves you should have been making during the year, deductions give a chance to reduce your taxable income. Taxpayers have the option of itemizing their deductions—which is good if you had large medical expenses, made significant charitable donations, or paid home mortgage interest—or taking the standard deduction. For taxes filed this April, the standard deductions are:

• Married couples filing jointly: $11,900 deduction
• Single/married filing separately: $5,950 deduction
• Head of household: $8,700 deduction

Just be aware that if you choose the standard deduction, you could be leaving a lot of money on the table. Kiplinger’s Personal Finance estimates that millions of taxpayers overpay on their taxes because they miss out on deductions or credits that they are qualified for.

Taxpayers claim deductions to reduce their income and then calculate how much they owe in taxes. Tax credits enter the picture at this point in the tax filing process. Credits directly reduce your tax liability through credits such as:

• Green energy tax credits
• Earned income credit
• Child tax credit

Once you’ve filed, you just have to wait for your tax refund, which can be returned in as little as 10 days, according to the IRS. Unfortunately, 90% of taxpayers should be prepared to wait up to 21 days. The closer to the deadline you file your taxes, the longer the wait is likely to be. However, e-filing and opting for direct deposit can shorten the process.

Since taxes can be very complicated, especially for high-income earners, it’s recommended that taxpayers speak with a tax advisor.

Have a question about how to handle your own financial challenges? Send it to us at moneymatters@pharmacytimes.com.