You need to find ways to reduce your tax liabilities for the coming tax season. Learn the tips to lower your tax bill here.
When 2021 tax season starts, you will have to file your tax returns on time. Filing your taxes on time comes with advantages such as avoiding late-filing penalties, among others. You may face a huge tax bill, and you need to think of ways to lower the bill. To help you learn the tricks to lower your tax bill for the 2020 tax year, here are 4 tips for you.
1. Contribute to retirement accounts
Contributing to your retirement account(s) comes with a lot of benefits. One of the benefits is to help you lower your tax bill. Therefore, if you haven’t contributed or funded your retirement accounts(s) you need to do fund them before the year ends. Making deductible contributions is a better deal as it helps you lower your tax bill for the year, and at the same time the contributions will compound tax-deferred.
2. Take advantage of all deductions you are entitled to
You need to take advantage of all deductions you are eligible for to lower your tax bill. The deductions will be used when calculating your taxable income. You need to consider medical expense deductions, mortgage interest, health insurance premiums, and other deductions to lower your taxable income. More to that, you need to use 2020 mileage rate to calculate mileage tax deductions which can help lower your taxable income further. In short, take advantage of all deductions you are eligible for, and you will have a reduced tax bill.
Take advantage of tax credits you qualify for
If you really want to lower your tax bill to a level where the IRS owes you a refund, you need to take advantage of all tax credits you qualify for. Some of the tax credits you need to look at include the child tax credit, earned income tax credit, energy tax credits, and others. Just like 2020 mileage rate, the tax credits have rates and the amount depends on several factors such as income. If you are eligible for these tax credits, you will lower your tax bill dollar for dollar, and with some being refundable, you can get a huge tax refund. Make sure you have the right tax documents, and use the right forms when claiming these tax credits.
File and pay on time
Filing your taxes on time can help you avoid late-filing penalties which is 4.5% of tax owed per month. In addition, paying your taxes on time can help you avoid a 0.5% late payment penalty of tax due per month. If you don’t file and pay what you owe on time, the IRS will add these penalties to your tax bill. Therefore, file and pay an estimate of your tax liability early enough to keep your tax bill low.
You may face a huge tax bill for the 2020 tax year. However, with the above tips you can lower your tax bill, and even get a tax refund from the IRS. Remember to take advantage of tax deductions, and tax credits you qualify for. That way you will significantly lower your tax liabilities for the 2020 tax year.