Most businesses especially small and medium-sized business generally overpay their taxes as they’re not properly aware of the advantages of tax deduction credits. Getting assistance from an experienced professional can help small businesses to correctly file their deductions and credits.
Before maximizing deductions and credits, it is beneficial to have a proper understanding of these two terms. The reason for both of these terms is to lessen one’s tax burden but in a different way. A tax credit partially relaxed your tax burden or debt. While your taxable income is decreased by a tax deduction. However, the tax deductions you can claim depend on your industry. The current federal income tax percentage is around 10% – 37% but through some of the tips below, you can end up paying less to the Internal Revenue Service (IRS).
How to maximize deductions and credits?
Here are 9 tips to help you maximize deductions and credits on your tax return:
- Keep good records: Make sure you have all the necessary documentation to support your deductions and credits. This includes receipts, bills, and other proof of payment.
- Know what you can claim: There are many deductions and credits that you may be eligible for, depending on your circumstances. Some common deductions include charitable donations, home office expenses, and student loan interest. Credits can include the earned income tax credit and the child and dependent care credit.
- Take advantage of tax-advantaged accounts: Contributions to tax-advantaged accounts like 401(k)s, traditional IRAs, and health savings accounts can reduce your taxable income and may also be tax-deductible. For example, if you have a high-deductible health plan, you may be eligible to contribute to a health savings account (HSA). Contributions to an HSA are tax-deductible and can be used to pay for qualifying medical expenses.
- Plan ahead: If you know you’ll have a large expense coming up, consider timing it to maximize your tax benefits. For example, if you’re planning to make a charitable donation, you may want to do it in the same tax year that you have a high income so that the deduction has a greater impact on your tax bill.
- Consider hiring a tax professional: If you’re not comfortable preparing your tax return, or if your financial situation is complex, you may want to consider hiring a tax professional to help you maximize your deductions and credits.
- Claim all available credits: There are many credits available that can help reduce your tax bills, such as the child tax credit, the American opportunity credit for education expenses, and the credit for renewable energy investments. Be sure to claim all the credits that you’re eligible for.
- Don’t forget about state and local taxes: In some cases, you may be able to claim deductions or credits for state and local taxes you’ve paid. This could include sales taxes, property taxes, and state income taxes.
- Consider tax-loss harvesting: If you have investments that have decreased in value, you may be able to sell them and claim a loss on your tax return. This can offset capital gains you’ve realized from other investments and reduce your overall tax bill.
- Get organized: Keeping track of your deductions and credits can be easier if you’re organized. Consider using tax preparation software or maintaining a folder with all your relevant tax documents in one place. This can help you stay on top of your tax-saving opportunities and ensure that you don’t miss out on any deductions or credits
How small business can reduce their taxes?
The best way is to hire a family member, switch to a more advantageous business structure, and by providing a retirement plan for workers. By adopting some of these tips small business can reduce their taxes to a maximum level.
Some of the examples of deductions and credits that you may be able to claim on your tax return are:
- Charitable donations
- Home office expenses
- Student loan interest
- Health savings account contributions
- Self-employed health insurance premiums
- Business expenses (for self-employed individuals)
- Job search expenses
- Shifting cost (if you moved for a new job)
- Earned income tax credit
- Child and dependent care credit
- Child tax credit
- American opportunity credit (for education expenses)
- Credit for renewable energy investments
- Credit for adopting a child
- Credit for elderly or disabled individuals
It is important to carefully utilize these examples and plan in a wise way so that small businesses can save enough and can also maximize their tax deductions and credits at the highest level.