If you find yourself with too much month left at the end of the money, you need to find a way to balance your budget and make your income equal to or greater than your expenses. Taxes are a big expense for most people. Lowering them leaves you with more money in your pocket to pay other bills. You’ll be able to balance your budget, and Uncle Sam won’t be siphoning off too large a portion of your paycheck.
Adjust Your Withholding
When you started your job, you completed a Form W-4 for your employer, which designated how many dependents you claimed, and determined how much would be held from your paycheck. Double-check your withholding and be sure you’re claiming all the dependents to which you’re entitled. If you routinely get a big tax refund every year, that’s a sign that you’re having too much withheld from your checks for taxes. Decrease your withholding and you’ll immediately put more money into your pocket in each paycheck. Don’t claim more dependents than you’re allowed, however, or you could find yourself with a tax bill to pay at the end of the year. Fill out a new W-4 for your employer and use the worksheet on the form to figure your correct withholding allowance.
Maximize Tax Credits
Tax credits reduce the amount of tax you need to pay. You subtract any credits after you figure your tax due. Take advantage of any credits due you, and you’ll directly lower your tax bill. For example, if you have children or you provide care for an elderly relative, you may qualify for the Child and Dependent Care Credit. If you adopted a child, you can receive a credit for that. If you’re single and your income is below $27,750, or you’re married and your combined income is less than $55,500, you can receive a tax credit for contributing to an IRA or an employer-sponsored retirement plans. This and all info here is valid as of July 2012; Congress enacts new credits from time to time. In the past they’ve awarded credits for making energy efficient improvements to your home, for first-time home buyers or for buying a hybrid car. Look for new tax credits each year and take advantage of any you qualify for.
Use Tax-Free Money
You can save for retirement, build a college savings fund for your child and pay medical expenses with money that’s deducted from your paycheck before taxes. This allows to build savings and pay less tax. If you’re not already participating in your employer’s retirement plan, doing so saves you money on your taxes now and helps you grow money for your retirement later. Open a 529 savings plan to sock away money for your child’s college education, and you’ll trim more off your tax bill. If you have a high-deductible health insurance plan, put tax-free dollars in a Health Savings Account and use that money to pay medical bills that aren’t covered by insurance. If your employer offers a Flexible Spending Account, take advantage of this to put away tax-free money to pay for eyeglasses, dental visits and other medical expenses.
Find Tax-Free Income
The IRS requires that you pay taxes on all income you earn. However, there are a few legal exceptions to this. Taking advantage of these can increase money in your budget without increasing your taxes. For instance, if you sell used goods online or at a garage sale, you don’t have to pay taxes on the money you make. The law also allows you to rent out your home for up to two weeks a year, tax-free. If you live in an area of the country that's popular with tourists, consider renting out your house to visits while you stay with relatives for a couple of weeks a year and pocket the profit tax-free.
Earning less money when you’re trying to balance the budget may seem counter-intuitive, but in some cases, earning less can actually net you more. If you’re teetering on the edge of one tax bracket and you have a part-time job or hobby that brings in a few dollars that pushes you over the edge into the next tax bracket, you might be better off giving up the money from those gigs and paying fewer taxes. Or if you’re married and one partner makes substantially less money while you pay big bucks for child care, you could be better off if the lower-earning partner stayed home with the kids. If you subtract taxes, childcare costs, commuting expenses and other costs associated with the lower-earning spouse’s job, you may find out you’re losing money. These scenarios certainly won’t apply to everyone, but when you’re trying to lower taxes and balance the budget, they’re worth looking into.
- Easy Ways to Lower Your Taxes: Sandra Block and Steven Fishman
- IRS: Get Credit for Your Retirement Savings Contributions
- IRS: Tax Topics – Tax Credits
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