While filing taxes can be one of the more arduous parts of personal finance, there are ways to make the process work for you. Regardless of whether you’re traditionally employed or work freelance, receiving a credit or deduction on your taxes can be an easy way to get some extra cash – here are some easy tips to lower your tax bill and make tax season a little more enjoyable.
Understand how taxes are determined
The United States uses a progressive tax system, which means that those with higher taxable incomes pay more in taxes. The government determines how much you owe by breaking up your taxable income into brackets, each of which is taxed at the corresponding rate. Thanks to this system, you won’t pay those rates on your entire income.
Income from jobs, tips and bonuses, investments, social security, pensions, real estate, unemployment, inheritances, and dividends can all contribute to your gross income.
Adjusted gross income (AGI) is your gross income minus certain payments made throughout the year, such as student loan interest or contributions to individual or health savings accounts. Allowable deductions and adjustments turn AGI into taxable income.
Maximize your tax deductions
You can claim credits and deductions when you file your tax return, which can reduce the amount of tax you owe. Both reduce your tax bill, but in very different ways.
- Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. For example, a tax credit of $100 will reduce your tax bill by $100.
- Tax deductions, indirectly reduce the amount of tax you owe by lowering your taxable income (the income amount that your tax bill is based on) by the percentage of your federal income tax bracket. So if you fall into the 22% tax bracket, a $100 deduction saves you $22.
While credits can make a bigger dent in your tax bill than deductions, both are ways to save money on taxes.
Getting a sense of what credits and deductibles you are eligible for in advance of filing, can help streamline the taxation process when it is time to file. To start, look into the eligibility requirements for different forms of tax credit: saver’s credit, student loan interest, charitable deductions, and freelance expenses if you are self-employed. Additionally, for 2021 taxes, you could qualify for child tax credits, child and dependent care credit, earned income credit, and adoption credit.
For Gig workers, different deduction options may apply; expenses like mileage, cell phone bills, work supplies, internet and computer-related expenses, and monthly health insurance premiums can all generate deductions. Using an expense tracker can help you identify opportunities for deductions and credits more quickly when tax season arrives. Check the IRS website for more information on eligibility for credits and deductions.
In most cases, you’ll receive your refund within 21 days; however, you can track your tax return on the IRS website. The fastest way to receive your refund is by filing taxes online and requesting your refund via direct deposit.
Prepare to file your taxes
Once you gather the necessary paperwork – depending on your source of income, this can include a W-2, 1099, 1099-INT, 1095-A, or a 1098 – you’re ready to get started on filing your taxes.
There are several ways to file your taxes, depending on how much you earn and where your income comes from. The IRS has free software that can lets those below a certain income level “free file,” making it easier to identify any eligible deductions or credits.
For those above that limit, you can file virtually with the IRS for free, or use a tax preparation software which may come at cost. Another option is to get support from a firm or accountant; the IRS directory is a great resource to find a verified tax preparer.
If you’re a freelancer, you’ll need a 1099 form and a thorough record of your expenses. Consider using tools like H&R Block and Stride, which can help gig workers track expenses and keep tax bills low. Additionally, unlike traditional workers, you may be required to pay quarterly estimated taxes, which are based on how much net income you expect to earn this year. Estimated taxes can help you to avoid penalties and can spread out your bill over time.
Still have questions about taxes, deductions, or filing as a gig worker? Master Your Card is here to help make your taxes work for you. For more resources, head to our Resource Center, where you’ll find informational videos, courses, and articles to demystify taxes and support you in feeling more confident about the process.
