Most people really like to get a refund at the beginning of each year and no one wants to see a large tax bill. Whether you are looking at personal finance or small business taxes, there are ways to ensure your tax liability is reduced. Here are four tax tips for reducing the amount you owe on your personal tax return.
Complete an Accurate W-4
If you work for an employer, you would have completed a W-4 form on your first day. This form asks for the number of your dependents, and that number affects how much withholding tax is taken from each check. Some people claim more dependents than they have so they receive more money each payday, but this can cause you to owe taxes at the end of the year. It is best to claim the accurate number of dependents on your W-4.
You can shelter some of your income from taxes by opting to save money through pre-tax deductions like a 401K, IRA, or health savings account. These funds are taken out of your check by your employer and deposited into the account. This reduces the amount of your income that is taxed. However, the funds are tied up in these accounts and pulling them out early can cause tax penalties.
Maximize Personal Expense Deductions
As with a business, you can claim certain expenses on your tax return and reduce your tax burden. It is easy to go overboard or take inappropriate deductions that result in a higher chance of audit, so you do want to be careful with this area. Most quality tax return software programs offer a prompted section on completing deductions. The software will also analyze your return for red flags, reducing the chance that you will take inappropriate deductions. Personal expenses that can be used on a tax return include home business items, improvements to a home, childcare, and medical expenses.
Know Your Credits
In addition to expenses, you may also qualify for credits. For example, you can claim a credit for your dependents, such as children. Just be sure no one else is claiming the child’s social security number on his or her return. There are other credits available to homeowners and various groups. If you are uncertain about tax credits, it may help to seek professional advice.
Understanding your financial situation, knowing your credits and documenting your expenses can save you a lot of money come tax time. You may even find you will receive a refund when you follow these tax tips.