What Is an Income Tax?
If you want to learn how to best manage your income taxes, you must first understand what it means. Here is a definition as given by Investopedia.com: “An income tax is a tax that governments impose on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligations. Income taxes are a source of revenue for governments. They are used to fund public services, pay government obligations, and provide goods for citizens.” This means that as a citizen you file an income tax return form based on which your tax obligations are calculated and you get the amount you have to pay.
Filing an Income Tax Form
Furthermore, the same definition goes on stating that “certain investments, like housing authority bonds, tend to be exempt from income taxes.” Thus, what is also important to know is that there are legal ways of reducing your taxes. Now all you have to do is read carefully what can reduce your taxes and then make a plan of managing your taxes successfully. Sounds difficult? Do not get discouraged. When Albert Einstein was asked about completing his income tax form he replied: “This is a question too difficult for a mathematician. It should be asked of a philosopher.” But do not despair, get yourself informed well, and you will recognize the ways how to best manage your income taxes.
Where To Start?
Firstly, eliminate mistakes in advance and try to find out as much as possible about common tax filing mistakes and how to avoid them. You can learn from other people’s mistakes and help yourself find your way around paying taxes correctly. Secondly, you can concentrate on noting down deductible taxes and making your own tax payment plan.
We can generally help you with some tips, but you should investigate them further and see how they can apply to your case and help you lower your tax amount. It is good to know that by moving abroad for employment, like getting employed in the Middle East, for example, you can fairly save on your income tax, so calculate your moving costs onlineand think about that adventure.
What Can Be Exempted From Your Tax Amount?
The law itself gives you possibilities to save on your taxes. On one hand, it makes you a conscientious taxpayer, on the other hand it allows you to make your life more comfortable and learn how to best manage your income taxes. For example, you can legally increase your tax deductions by saving for your retirement, prepaying for healthcare and childcare. Sometimes it is wise to consult an income tax accountant when filing the tax form for the first time. There are things to consider when choosing accounting and tax services– hire an income tax specialist and check their fees. Let us consider some of the possible tax deductions:
- Medical expenses
- Dental expenses
- Contribution to charity
- Expenses for education
- Mortgage expenses
- Interest deductions
Retirement Savings
Maximizing your retirement savings can be one of the best ways to reduce your income tax. This can be achieved both through the employer – employer-sponsored plan or through an individual retirement plan. How much can be deducted depends on the applicable plan and your income. One thing is sure – the money will grow in your account and when the time comes to withdraw it in retirement, it will be taxed at the ordinary income tax rate valid at the time of withdrawal. This surely is one of the best ways to manage your income taxes.
Health Savings
When it comes to health insurance, you can either have a medical flexible spending account or health savings account. A health savings account is even better because you invest your pre-tax money in it, which lowers your tax bill. It can further be used tax-free for covering your health expenses.
Tax Credits
You can rely on tax credits to lower your tax bill considerably, and there are tax credits for a variety of things such as child care, adopting children, education expenses, making your home energy-efficient, etc. When compared to the above-mentioned deductions, credits are worth more because they lower your tax bill following a dollar-to-dollar ratio. This means that a 1,000 USD tax credit saves you 1,000 USD in taxes.
Investments – Time is Money
If you have the stock and keep it only for a year, then you might not save anything on taxes. However, if you decide to keep the stock for more than a year or even longer, it will be considered as a long-term investment and you can save a larger amount of your tax bill. This is definitely some food for your thought.
Living and Working Abroad
Income taxes are different around the world, so moving abroad to a country with no income tax could be one of the ways to best manage your income taxes and save for the future. It is where the motto “ live abroad, make more money and pay fewer taxes” becomes real.
In the Middle East countries – The UAE, Oman, Kuwait, Qatar, you earn a tax-free salary. If you are a US citizen, this could mean that you can save a larger amount of your income under the US tax exclusion and pay income taxes only on the amount that exceeds the prescribed tax-free amount. For example, if the limit for tax exclusion is the amount of 150,000 USD, this means that you will not pay any taxes on that amount, but only on the amount that exceeds this limit. If you are already giving it a thought, there is a safe way to confirm the cost of your relocation, before you set on a journey.
Final Thoughts
Consider the above-mentioned suggestions for income tax deductions, ask for professional advice, make your own income tax savings plan. Try it, and good luck!
