Everyone in the United States who earns more than $600 in a calendar year is required to pay taxes on their income. If you do not file an income tax return and you earned enough to qualify to pay taxes, you could face a hefty fine or even some time in jail. The IRS does not work quickly, but they are very thorough. You might think you got away with skipping your taxes this year, but a few years from now, you'll hear from the IRS when they figure out that you owe them money. Remember, the FBI did not catch Al Capone; he was caught and convicted by the IRS.
There are some credits and deductions written into the tax code that can help lighten your tax burden if you qualify. A tax credit is a specific amount of money the government will pay you for your participation in social activities that congress has agreed are good for the country. A tax deduction allows you to get back some of the money you spent on purchases related to your business. It's in your best interest to find out how many deductions or credits you can claim each year. Sometimes the government ends up owing you money instead of the other way around.
Most of the people who qualify for tax deductions are independent contractors or have children under the age of 18. You have to list out deductions one by one on your tax form in order to receive credit toward them from the IRS. Typical deductions include mileage and maintenance costs for vehicles used on the job, energy costs for offices, or equipment purchases. If you have specific medical expenses, some of those can be written off through tax deductions as well.
Tax credits reward you for being socially productive. One of the most commonly claimed tax credits is the Child Tax Credit, which pays parents up to $1,000 per child under the age of 17. The Earned Income Credit paid out to adults who earn less than $43,998 per year. Homeowners who make substantial energy-saving improvements to their homes can qualify for the Energy and Appliance Tax Credit. College students can receive several tax credits, including a $2,500 American Opportunity Tax Credit and a $2,000 Lifetime Learning Credit.
Update Paperwork Throughout the Year
Planning ahead is the best way to maximize your deduction savings and credit qualifications. The list of qualifications for deductions and credits can be extensive, so it is a good idea to begin looking into next year's deductions and credits as early as possible. When you know what you might be able to receive credit for, you will be able to keep track of your expenses more efficiently. Organization makes it easier to prepare an itemized tax return. Trying to track down your spending history at the last minute when you're putting the return together is not a good idea.
There are many different reasons tax credits are offered. Make sure you understand what kinds of credits are available so that you can plan activities that give you a better chance of qualifying for a tax credit. For example, you could justify the expense of updating your home's windows or insulation by learning how much you would earn as a tax credit at the end of the year. If you're considering going back to college, the potential tax credits might help you decide when to go ahead and enroll. A good working knowledge of available tax credits will also help you keep track of the things you do in a year that will qualify for a payout on your tax return. You will be more careful about keeping paperwork regarding creditable items if you know that you could earn at least some reimbursement for them from the government on your taxes.
Keep Track of Spending for Next Year's Deductions
You can only receive deductions for the expenses you can prove you made during the year. It is important to keep your receipts and any invoices that relate to a potential tax deduction. Create a file to store auto maintenance receipts, toll receipts, and any car-related expenditure if your travel relates to the money you earned. You should also file your energy bills and equipment purchase receipts if they relate to your earnings. Restaurant meals, airfare, and hotel expenses can all be written off at the end of the year, so be sure you file receipts from work-related meals and travels so that they are easy to find when it is time to file your taxes. Staying organized and planning ahead will ensure that you receive all of the deductions you've earned.
Jessica Bosari is a freelance writer and blogger for various publications and her ownblog. You can read more of Jessica's work here. If you have any comments or questions about SavingTools or about saving money, leave your comments in the form below or email firstname.lastname@example.org. Thanks!