Highlights of today’s show:
- Advertisers know what to do with your tax refund
- The three basic things to know about the tax systems
- Ways to lower your taxable income
- Tax credits you might qualify for
- Why I think the tax system is too complex
After talking about four major tax myths in last weeks lesson, today we share tips on how to reduce your taxes for this upcoming filing season and beyond. Before we learn how to lower our taxes we first need to know the following three basic things:
- Our Adjusted Gross Income (AGI)-Our AGI is the amount that we pay taxes on before deductions and credits are removed.
- Tax Brackets-It is important to know what tax bracket you are in because it will help determine the tax impacts of having certain deductions or added income. To view what tax bracket you are in for 2013, check out this link.
- Do you take the standard deduction or do you itemize? The government allows us to deduct certain expenses on our taxes; mortgage interest, charitable contributions, property taxes paid, state and local taxes paid are the most common. But we can deduct those only if they exceed the standard deduction which is the amount that everyone may deduct from their AGI. In 2013 the Standard Deduction is $12,200 for married couples filing jointly and $6,100 for individuals.
After knowing these three basic things we can now discuss ways to lower our AGI. There are two major ways to do that:
- Contribute to a Health Savings Account (HSA)-I love my HSA and for good reason. An HSA is a savings account attached to high deductible health insurance plan that you and your employer contribute to. As long as you use your account to pay for qualified health expenses, the contributions are tax free! Your contributions reduce your AGI which ultimately lowers your tax bill.
- Contribute to a 401(K) or IRA-Who says savings don’t pay off? Not only are you saving for your future when you contribute to a retirement account but it can help save you come tax time.
Now that we have lowered our taxable income, we can focus on tax credits. There are a lot of tax credits available to us (check out IRS.gov for a full list of 2013 tax credits) but below are some common ones you may quality for:
- Child credit-You get a credit of $1,000 per child under the age of 17 on your taxes. This is to help offset the cost of raising your child. If you are parents you know that a child costs more than $1,000 a year to raise, but I’m not complaining.
- Education Credits-Go back to school this year to work on your bachelors or masters? You may qualify for educational credits.
- Adoption Credit-If you adopted a child in 2013 you may qualify for a reimbursement of up to $12,970.
Worn out yet? If so I don’t blame you. After doing two lessons worth of shows on taxes I’m really frustrated with the tax system. At the end of the show I give my opinion (rant?) on the state of the current tax system and share why I think major reform needs to be made.
Finally we also discuss how the marketers on TV and radio definitely have a plan for your bonus and tax refund. They want you to buy a new car, take a vacation, or remodel your home. Not that those things aren’t nice but do you have a plan for your tax refund? Like our monthly income, a large financial windfall needs to have a plan to best be used effectively. For advice on how to handle your refund this year, check out the podcast I did on receiving a financial windfall.
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