How to Pay Less Income Tax
Pay less income tax by considering whether to itemize deductions instead of taking the standard deduction, deducting interest paid on home loans, learning about retirement savings plan deductions and deducting student loan interest. Keep receipts for non-cash deductions made during the year with advice from a certified public accountant and personal financial planner in this free video on taxes.
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Hi, I'm Miranda Chook, a CPA. There are many ways to actually reduce your income tax. First off, there are many deductions and credits that are simply overlooked by taxpayers. One way to educate yourself on these would be perhaps to go and download some software; many of it actually available for free at the federal level, and if you use the standard deduction you could perhaps use that free software to do a comparison between what would happen if you itemize deductions versus the standard deduction you're currently taking to see which is more advantageous to you. It starts to make sense to itemize deductions, particularly when you have a mortgage on a primary residence, and the significant portion of your monthly mortgage payments go to pay interest. Continuing on this line of interest, if you have a home equity line of credit the interest on the first hundred thousand dollars of principal may also be deductible. Now, there are other things that you can do. For example, you can take advantage of some programs at your employer's; for example 401k plans, flexible spending accounts. You tell your employer how much you want deducted from your pay and they set it aside for those purposes, but there's no requirement to withhold any federal income tax on them. A fifth way to reduce your taxes is to consider taking losses on some stocks or mutual funds if during the year you've taken some gains on stocks and mutual funds. Then, you can offset some of the taxes you're going to have to pay on those gains with some of the losses. Also, think about if you have some student loans. If you or your parents paid interest on those loans then that interest may be deductible. And speaking of education, there's a relatively new benefit for education credits that may be available to you or your dependent so you might consider taking a look into that. And finally at least for purposes of this segment, keep in mind some non-cash deductions that you might be able to take advantage of. Keep receipts if you donate your used clothing, or donate an old bicycle that your kids have outgrown, or an old car. Those may be deductible as well. And keep in mind the balance between deductions; the cost of them as well as the actual tax benefit you'll get from the tax deductions because it's not necessarily a one to one ratio. Now, tax credits will reduce your taxes for dollar for dollar. So, please contact an experienced financial advisor to find out if there are more deductions and credits that might be available to you.