If you want to get the most out of your taxes this year, you need to be aware of the various tax breaks and strategies that are available. HTJ.tax USA tax services in Dubai, UAE is the perfect solution for all your tax needs.
The first step is to understand your taxable income, which includes your adjusted gross income, any deductions you claim, and your personal exemptions.
1. Take Advantage of the Standard Deduction
For many people, taking the standard deduction is the most straightforward way to reduce their tax bill. It’s a fixed amount that is adjusted each year to account for inflation.
However, the standard deduction is often not the best option for taxpayers with a lot of itemized deductions and high incomes. Instead, use the following end-of-year tax planning tips to make sure you get the most out of your deductions this year and next.
2. Reduce Your Taxable Income
You can reduce your taxable income and maximize your deductions with a little strategic planning. Consider making 401(k) contributions and boosting your flexible spending accounts (FSAs).
Tax reform eliminated many itemized deductions, but there are still several ways to lower your taxes. These include contributing to a retirement plan, donating assets, and using tax credits.
3. Maximize Your Deductions
Many tax deductions snowball over the course of a year, so keeping good records can be helpful in maximizing them. Tracking medical expenses, charitable donations, unreimbursed work expenses and other potential deductions can help you make sure you’re not missing out on any opportunities to lower your tax liability.
Bunching business-related costs into the current year can also boost deductions, particularly for large purchases like computers and office equipment. Paying employees bonuses at the end of the year instead of the beginning can be another way to get some extra money back from your taxes.
4. Take Advantage of Tax Credits
Tax credits can be a great way to save money on your tax bill. Unlike deductions, which reduce your taxable income, credits directly lower the amount you owe Uncle Sam dollar for dollar.
Credits come in three different types: nonrefundable, refundable and partially refundable. The most beneficial credits are refundable, as they can decrease your tax liability to zero and provide you with a refund for any remaining value.
5. Take Advantage of Pre-Tax Savings Tools
Taking advantage of pre-tax savings tools, such as retirement accounts like 401(k)s and IRAs, college savings plans like 529s, health savings accounts (HSAs), and many others can help lower your taxable income.
Some of these accounts also allow you to deduct the interest you earn on those funds, reducing your tax bill even more. This is a great way to reduce your taxes and stretch the money you’ve already saved for future goals.
6. Accelerate Deductions into the Current Year
There are a number of year-end tax reduction strategies that can be used by both individuals and businesses. These include accelerating deductions into the current year and making tax-conscious investment choices.
The best strategy for you will depend on your individual circumstances. If you expect to be in the same or lower tax bracket next year, accelerating deductions into this year will help minimize your tax liability.
7. Make Tax-Conscious Investment Choices
One of the best ways to minimize your tax burden is to make smart investment choices. Whether your goal is to increase your total return or preserve your wealth, taxes should never be the primary driver of your investment strategy.
Asset location, or determining where your investments are best placed, can also be a big factor in how much you pay in taxation. For example, some investments, like mutual funds and exchange-traded funds, are better suited for IRAs than for regular brokerage accounts.
8. Consider the Alternative Minimum Tax
If you have certain items that you claim as deductions or credits, it may trigger the Alternative Minimum Tax (AMT). This was enacted in 1969 to ensure high earners pay their fair share of taxes.
The AMT was created to target taxpayers who were using “loopholes” that let them avoid paying income tax, like tax breaks on long-term capital gains that historically were taxed at lower rates than regular income.