Since tax time is rapidly approaching, you are probably thinking about how to reduce taxable income. Although you may have been thinking about it all year, there may still be time to lower your taxes even more before the year’s end. One of the best ways is to take advantage of tax exemptions and credits.
Capital Gains Exemption on the Sale of Your House
When you sell your home, you may be entitled to a capital claims exemption on the sale. The Internal Revenue Service says that your house must have been your primary residence for at least two out of the last five years that you owned the home. If you are single, you can get an exemption of $250,000, and if married filing jointly, up to $500,000.Contributions to a Retirement Account
If you have a retirement account, contributing the maximum amount allowed is one of the easiest ways to reduce your taxes. The money put into some of these accounts—whether an IRA or 401(k)—is deducted from your taxable income, which reduces the taxes you owe.Note that some Roth accounts only use aftertax dollars and will not give you a tax deduction. The money in these retirement accounts grows with tax-exempt interest and remains tax free when withdrawn. You can contribute to your 401(k) until the end of the year. IRAs are different, which allows contributions up until April 15.
Health Savings Account (HSA)
An HSA is a savings account attached to a health plan with high deductible amounts. It also acts like a retirement account. Money in the account builds tax-free, and no taxes are due on money used to cover qualified medical expenses. Individuals can contribute as much as $3,650 in 2022, and families can contribute up to $7,300. Contributions are pretax.After you turn 65, you can use the money for any purpose, and you will not have to pay any taxes on withdrawals. It makes an excellent tax exempt way to save money for retirement, especially if you are in good health now.
Make Contributions to Charity
Money donated to charities, as well as clothing and other goods, are tax deductible. You can also donate stock and put it into a donor-advised fund. The money in the fund is tax exempt. Money in these funds, says Money.USNews, is also exempt from capital gains tax. It is also possible that you may be making charitable donations through your workplace.Education Costs and Loan Repayments
Going to college is costly. You can recover some of the expenses because the government will let you claim up to 20 percent of the costs for tuition and fees. You can also include any books or supplies required for courses. Also, NerdWallet says if you paid any interest on student loans this year, you can deduct up to $2,500.Claim Your Self-Employed Business Expenses
If you have a business and are self-employed, or if it is just a side hustle, there are many tax deductions that you can claim. Each one will reduce your taxes.Almost every legitimate expense for your business can be a tax deduction. More expensive items, such as cars, special equipment, computers, etc., will be depreciated over time. Forbes reveals that you can deduct the cost of mileage, advertising, business-related travel, office supplies, cellphones, training, shipping, website costs, professional publications, credit card interest, your health and dental insurance, and more.
Travel expenses are also deductible. Even some of your vacation costs are deductible if you conduct some business during that time. You can deduct the portion of costs that were related to your business.
If you use your home office regularly and exclusively for your business, you may be able to deduct those costs, too. You can claim the percentage of your home space used for business and all expenses involved—utilities, rent, real estate taxes, repairs, etc.
Self-employed people are still required to pay into Social Security and Medicare. It amounts to 15.3 percent of your income. The government allows you to deduct 50 percent of this amount because an employer usually pays half of these fees for their employees.
Combine Medical Expenses
Medical expenses can be costly, but you may not have enough to be more than 7 percent of your adjusted gross income (AGI), thus allowing you to itemize. You cannot include reimbursed expenses from an insurance company. TurboTax says that you may try and save some of those treatments until next year to combine with other expected costs next year.Many medical costs can be included, including acupuncture, smoking-cessation programs, and more. Investopedia mentions that you can also deduct the cost of travel to medical care. For 2022, the cost is $0.18 per mile for the first half of the year and $0.22 per mile for the second half of the year.
Electric Vehicle Credit
Buying an electric vehicle in 2022 can enable you to claim a tax credit. Depending on which vehicle you purchased, you can get a tax credit of $2,500 to $7,500. The amount of the credit is determined by the manufacturer and the vehicle’s weight.Home Mortgage Interest
If you own a home or have a mortgage on one, you can claim several taxable deductions. If you have a mortgage, you will receive a Form 1098, which enables you to deduct the interest you paid; it is reported on Line 1. If you bought a house in 2022, you can also deduct the cost of any points you paid to reduce the new mortgage’s interest rate.The Saver’s Credit
One tax credit many people in the low- to moderate-income brackets are unaware of is the saver’s credit. This credit is for those with an AGI of not more than $41,000 for married filing jointly but who put money into a qualified savings retirement program. A credit means that it is nonrefundable, but it will reduce how much you owe in taxes.If you qualify for the credit, TurboTax says that you could get a credit of 50 percent, 20 percent, or 10 percent of the first $2,000 you contribute. A couple could get as much as $2,000.
There are many ways to reduce taxes. For the best results, and because every case is different, you may need to talk to a tax professional to discover more tax exemptions and credits.
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