08 May Underused but Effective Money-Saving Tax
It’s a citizen’s responsibility to pay tax if he or she expects to enjoy the services of the government: infrastructure, social services, etc. But if you are knowledgeable about how tax works, then you should know that there are many ways to reduce your tax. Here are some underused but effective money-saving taxes:
Donations to charitable organizations
A lot of people actually know about this tax break. But most of them think that this is just a way for big companies to dodge tax payments. But actually, it also works on personal taxes. Giving to charity should be about helping and being sincere about it. However, if we can enjoy a tax break from it, we might as well take advantage of it.
First, you have to know which charitable organizations will qualify you for a deduction against your income tax. You don’t have to feel guilty about being choosy about the organization when you really just want to help. This is also for your own benefit since there are a number of illegal and shady “charitable” organizations out there. It is best if you chose a group that has credibility and is of good repute.
The reason that we mostly hear about big companies using donations for tax breaks is that deductions are based on your income bracket. The higher your income bracket is, the higher the deduction is from donations to charitable organizations. This is not the most effective way to save on tax, but it can still save you some amount.
Also, if you are donating an item that is worth $500, you need to have it appraised by a qualified appraiser. Of course, the appraisal comes with a fee. You can also get a deduction from said appraisal. And if you volunteer your time to a charitable organization, you can also use your transportation expense for deduction. Not a lot of people bother about this but this is really quite a benefit.
Selling your home
There are a number of tax deductions from selling a home. It’s among the most underused taxes because it’s not always a person sells his home. Also, a lot of people are not aware that selling a house could give them some money-saving tax deduction. We already know that owning a home will give you tax breaks—deductions from mortgage interests and property tax.
But when you sell a home, you get some deductions, too. Keep the receipts from expenses you have incurred while moving your things from the house—that includes the bill from movers. This can be deducted to your personal tax. And since selling a house is not immediate, you can still use the property tax deductions since you still lived in the house for some time. You may also use the commission you gave your real estate agent to offset or reduce your capital gains tax. Closing-related fees are also handy in saving some money.
Property tax from vehicle
Every year, you have to pay taxes on your vehicle, even if you bought it some years back. This tax is in the form of annual vehicle registration. The point here is that the vehicle runs on government-financed roads, so you have to pay Uncle Sam. Well, if you have to pay tax on this, you might as well get a deduction under property tax, too. After all, the vehicle is your property.
Miscellaneous tax credits are designed to reward expenses that are for the greater good of the world. This sounds corny but really, if you buy a hybrid vehicle, which has zero to minimum carbon emission, Uncle Sam is likely to reward you for being conscientious about the environment. This tax break goes under miscellaneous tax. Hybrid and electric vehicles are more expensive than regular ones—unless you purchase a luxury vehicle. But the government recognizes that by buying an environmentally friendly vehicle, you are helping America. So you get a tax break of between $3,000 and $4,000 for hybrid vehicles bought within 2006 and 2010. For electric vehicles, you can save up to $7,500 in tax breaks if these are bought in 2010 and later.
There are other miscellaneous taxes you can take advantage of. As the name suggests, these are taxes that do not really fall into a certain category. One of these taxes is the foreign tax credit. This form of tax savings refer to investments that you have abroad. Because you are expected to pay taxes from the home country where your investment belongs to, the American government will help you save on federal income tax.
Another credit that falls under this category is the Mortgage Interest Tax Credit. But you can only qualify for this if you purchase your first home—your permanent home and not a vacation house. You have to get a Mortgage Credit Certificate from your local government unit, which will determine if you are qualified to enjoy the tax break.
But here is something you must know about Miscellaneous Tax Credit, this is essentially a deduction to your adjusted gross income and not a tax credit. This means that your taxable income is reduced rather than the total tax liability. The items that could fall under this category should be itemized and if these exceed two percent of your gross income, then that’s the time there will be a deduction.
Oh, and another thing that could help you exceed two percent? Dry cleaning and laundry. So keep those receipts since those will be handy come tax season. The same goes for shipping. The logic here is that sometimes, by doing your job, you are forced to ship some things from one state to the other—even from one country to another. And because some airlines charge you for baggage that you wish to check in, the receipts can be itemized under miscellaneous tax, too.
Other stuff covered under this category is the cost of hotel stay and internet use. That is, if your hotel stay is related to your work, and so is the internet use. Just keep those receipts and help maximize the two percent gross income to enjoy a tax break.
- Medical expenses
Health is wealth, they say. And there is nothing truer than that when tackling tax breaks. If you are not yet a senior citizen and your medical expenses have exceeded 10 percent of your gross income, then the Internal Revenue Services will allow you to deduct this from your taxes. But this only works if you did not get a reimbursement from your insurance company. If you are personally paying for a long-term care insurance, then this could be deducted from your tax as well. But you cannot claim this if your employer subsidizes a part of the insurance.
Then here’s another underused money-saving tax tip, transportation in going to and from the doctor can be deducted, too.
Earned Income Tax Credit
According to a story from the Associated Press, this is one of the most overlooked tax credits—and it is basically a reward for those working really hard. One of five qualified Americans reportedly do not take advantage of this tax credit. Apparently, the average amount of tax credit from Earned Income Tax is $2,400. But the maximum could be around the $6,000 margin. This is actually one of the bigger tax credits one could enjoy. Those who are earning less than $54,000 are eligible for this form of tax credit.
The reason why this is overlooked is because some employees are exempted from paying taxes—those who fall below the income threshold that would qualify them from paying taxes. But according to experts, you can claim the credit anyway—whether you are required to file a tax return or not. Over five million taxpayers reportedly missed out from enjoying this tax credit.
The best way to keep tabs on tax deductions is to keep all records of financial activities. Keep your receipts and if possible, start recording them based on the possible tax deduction category. This way, come April, you will not be overwhelmed by the number of receipts and the many paper carrying numbers on them.
One of the reasons many people overlook some money-saving tax breaks is because they are ill-informed. It is nobody else’s job to educate you about your taxes. Knowledge solely relies on you. Know Uncle Sam, know how government works and know IRS rules and regulations, as well as their provisions. The IRS will not tap you on the shoulder and tell you about the many tax credits you can enjoy.
Once you have the proper knowledge about tax credits and deductions, filing a tax return is just so easy. Not to mention, easy on the pocket. Do your tax return ahead of time so you have enough leeway to go over your papers and documents.