How to Save Income Tax
Here are the many solutions for Tax planning and hence saving optimum Tax of an employee.
HOW to Save Taxes
Everybody is looking for ways to lower our tax bills. Following are some very simple ideas on how to reduce income taxes. It’s important that all families take a look at these tips and see which ones can help you reduce your tax bill.
Fund your retirement – Of course, we all need to save for retirement. But, did you know that saving for retirement is a great tip when you’re wondering how to reduce income taxes? By saving for retirement, you’re reducing your adjusted gross income by the amount you save, thereby reducing the income you have to pay taxes on.
Sell stocks that aren’t doing well – Look at your portfolio and determine the stocks that are worth far less than when you bought them – and then sell them. Losses on stocks are tax deductions. If you sell them for more than you paid, then you’ll have to pay capital gains taxes. When you’re trying to figure out how to reduce income taxes, don’t forget to look at those stocks that have lost money for you.
Get a mortgage – If you don’t own a home, you’re missing one of the biggest tax savings opportunities, and it’s no wonder you’re asking how to reduce income taxes! The interest you pay on your mortgage is tax deductible, and in the first few years of a mortgage, most of your house payments go to interest, so you can save a bundle.
Get a second mortgage -If you have other debts, like a car loan or credit cards and you’re wondering how to reduce income taxes, consider taking out a home equity loan and using the money to pay off your other debts. Like your primary mortgage, the interest you pay on your home equity loan is tax deductible, but the interest on your credit cards and car loans is not.
Deduct Your Child’s Tuition – If you’re paying college tuition you can deduct this from your taxes, too. Of course, the tuition must be coming out of your pocket, not from a tax free savings account for college like a 529 plan. If you don’t have a child in college, consider taking a few classes yourself, as your tuition is deductible too!
Make your home more energy efficient – When you require new appliances for your home, such as a hot water heater, be sure to look for appliances that carry the government’s energy star rating. Items purchased with the energy star rating are eligible for tax deductions. In addition, when you replace your old appliances with energy efficient ones, you’ll save money every month on your utility bills.
It’s compulsory for you to check your ITR yourself or hire a Chartered Accountant. If you do not hire a C.A. you must take some Precautionary steps before filing a return. Do you prepare your own income tax return to save money on preparation? If you do, or you are planning on using this method on your next return, there are some things that you should know that will help you to avoid making costly income tax errors. Errors that can cost you some of your refund or that can cost you in time having to amend your return and send it in again.
Here are some income tax tips to help you get started:
1. Check for errors in your personal information on the income tax return such as your PAN number, address, Bank Account No.,
2. Take the most beneficial deduction. Depending on your circumstances, either the standard or itemized deduction may keep more money in your pocket. You should do the worksheet in your income tax instruction booklet to see which one would be best.
3. If you have a home office you can deduct a percentage of your mortgage interest as well as your utilities and other things you may have not thought of as business expenses.
4. Don’t forget to take any medical expense deductions that you have available. If your employer takes out your health insurance after taxes and you can take this deduction. Include dental and prescription costs as well.
5. Make sure that you have all of your forms before you file your income tax return. Think about any extra jobs or pay you may have received as well as interest you have accumulated.
6. Take your state and local income tax deduction from the previous year’s returns.
7. Check the return at least twice for any math errors even if you are using a calculator. These can be very costly and are easy to miss.
8. Don’t forget to get all of the necessary signatures on the return. If you are married filing jointly, you will need both spouses to sign.
9. Consider using tax preparation software. It is more accurate than self-preparation and it can be easy to use and understand and it will check your return for errors for you. You can also get free or low cost tax preparation through the Income tax return Preparer if you have a low or moderate income.
The first option to save money that comes in everybody’s mind is to somehow reduce the tax burden.
It is very essential to know, in detail, about the tax laws. For instance, if you are into a small business, you need to know the tax laws pertaining to a small business.
If you are a business owner, bear in mind that you ought to be strong at managing the accounting systems and also at tax planning.
Here are the steps you should follow to save the tax burden:
• As per the law, your tax liability can be reduced if you hire your family members to work in your business. In order to convert high tax rates to lower ones, you will have to pay your spouse or your children for the work they have done.
• Ensuring that you meet the IRS’s criteria, try to hire independent contractors instead of employees. This will help you to save on payroll taxes.
• Another option is to go for a “deferring income”. For this, receiving money should be postponed to January instead of December. Thus, you can prevent the payments received from being included while tax is calculated.
• Similarly, in order to take advantage of tax deductions allowed for charitable donations, make sure all your donations are made in November or December but not in January.
• Expenditure on equipment and office supplies, if maximized, can help you to get tax rebate.
• Try to include all the business related travel in the current fiscal year.
• No bill should be due. Make sure all payments are done much before the year ends. This is helpful as the payment that is made to cell services, rent, insurance, and utilities related to the business can be included for applicable tax waivers.
• Ensure that money paid to licensing fees, businesses taxes, annual memberships to businesses related organizations etc., is deducted from your taxable income. Also, the insurance premiums and machinery are eligible for tax deductions.
• The management and administration expenses as well as money spent on maintenance and repairs are eligible for a rebate.
• Finally, as the tax deductions are different for different accounting systems that you use in your business, choose between cash accounting system and an accrual one.
Thus, there are a number of ways in which you can save money and reduce the tax burden.
1. Keep all business related receipts. IF you purchase something required for your job and are NOT reimbursed by your employer, that item may well be deductible for you as a ‘job related expense’. As a matter of habit, keep all receipts for job related expenses.
2. Be aware of all deduction options. When you know what deductions you can take at the beginning of the year, you are more likely to save money later in the year on your tax debt. Job related travel, safety deposit boxes, and more are deductible if you choose to itemize.
3. Don’t loose out on tax credits. Tax credits are created to benefit those who have unusual expenses during the year that are not legally deductible. Using the tax credits provides a benefit of returned cash for your expenses when you qualify.
4. Consider Tax Free Investments. When investing money for retirement or education benefits, consider a Tax Free Investment. The lower value of returns may balance out on reduced taxability of the investment.
5. Take a loss. Occasionally, the pay off for selling an investment at an apparent loss, can result in dramatically reducing your tax debt, gaining a benefit of less money spent, and more money gained. Your Tax Consultant can guide you, but will need your Tax information prior to the end of the year.
6. Charitable Donations. More than money, your donations to charity are deductible. If you donate clothing, furniture, or other merchandise to a recognized charity, get a receipt and use the receipt as a deduction on your taxes. Mileage driven for charity is also deductible.
7. Gifts – giving saves you money. If you are retired and your children are due to inherit a large sum of money, gifting them the maximum allowable amount each year is often preferable to maintaining a huge estate and paying estate tax. Consider gifting your children and allowing them to enjoy their inheritance early. (Your tax consultant will have other options for saving your retirement tax moneys also.)
8. Maximize your Retirement Contributions. If you’re in that ‘other category’ too young to retire, too old to have children for deductions, it’s often recommended that you maximize your Retirement Contributions. This contribution can save you money anytime, and provide a viable option for retirement.
9. Put children on the payroll. For legitimate expenses, if you pay your children (over 14) for deductible expenses, pay them a check and pay taxes. Allow them to pay their own expenses with money they earn.
10. Double-check your Tax Documents. Many errors are made on tax documents that would save you money if caught before taxes are filed. EVEN if you have a competent Tax Consultant/Preparer doing your taxes, double-check numbers, placement of numbers, and items on your tax documents for correctness. Accounting errors can cost you money.
Having a Tax Preparer who willingly offers information about your Taxable Income and Deductions provides far better service than a minimum service whom you pay less, but end up paying more in taxes. Consider the additional amount you are paying in taxes without quality consultation, when considering your Tax Consultant’s Fee.
Some Tax Saving Tools
- Equity Linked Saving schemes :
ELSS is an instrument sold by mutual funds for the specific purpose of enabling taxpayers to save their taxes. The proceeds from ELSS are mostly invested in the stock market so that the investors get the benefit of appreciation in stock prices, thereby making the stock market work for investors. The tax deduction for ELSS is available under section 80C of the Income Tax Act 1961 and the maximum amount invested in ELSS which will qualify for tax deduction is Rs, 1, 00,000 in any one given year, subject to the amount invested in other instruments qualifying for such deductions. Some of them include Birla Tax Plan 98, Franklin India Tax shields (97, 98, 99), SBI Magnum Tax gain, etc.
- Life and Medical Insurance Plans:
Life Insurance Policies have long been the most popular tax saving instruments among tax payers. Insurance policies offer twin advantage for tax deductions on premium paid and insurance cover for the insurer and his family in the event of a financially debilitating event such as accident, death, etc.The premium paid on life insurance policies qualify for tax deductions under section 80C, subject to a maximum of Rs.1 lakh per annum.Most companies offering Life Insurance also offer medical insurance policies as well as pension plans which offer tax deduction under section 80D, subject to a maximum of Rs.10,000(rs.15000 for senior citizens above 65 years of age) in a year.
- Housing Loan:
The tax deduction on both the principal and the interest paid (during the financial year)on the loan is available .The maximum deductible on account of interest paid on housing loan during the financial year is RS.1.50 LAKH UNDER SECTION 24(B), While the maximum amount deductible on account of principal repayment of housing loan is Rs1 Lakh under section 80C.Hence a tax payer who has taken the housing loan is eligible for deduction of a maximum amount of rs.2.50 lakh on account of principal repayment and interest paid on housing loan.
- Public Provident Fund:
The contributions made to the Employees provident fund (EPF) and Public Provident Fund (PPF) are also eligible for tax deductions under section 80C.While the contribut6ion paid to EPF by the employees are subject to the overall ceiling ofRs.1 Lakh under section 80C.The contributions made to PPF are subject to a maximum of Rs 70,000 under section 80C.
- National Savings Certificate:
It can be bought at any post offices in the country. While there is no upper limit for investment, the tax deduction on NSC is available subject to overall limit of Rs.1 lakh under section 80C.The tenure of investment is 6 years and the rate of interest is 8 percent(compounded half-yearly). Unlike investment in PPF, no premature withdrawal of the amount is permissible in the case of NSCs.
- Term Deposits and Bonds:
Many of the commercial banks have fixed deposit schemes which qualify for tax deductions. These deposits have a lock-in-period of five years and a coupon rate of 8-9 percent. Investments in these deposits are subject to the overall ceiling limit of rs.1 lakh per annum under section 80C.Eg.Infrastructure bonds floated by government and public sector companies.
There are other specified expenses such as registration charges and stamp duty paid on house property, tuition fees for children’s education, among others, which qualify for deductions under section 80C. Under other sections, expenses like conveyance allowance, food coupons etc also qualify for deductions. There are also special deductions/concessions for senior and disabled tax payers.
Income Tax Calculator
Download Income Tax Calculator for financial year 2009-10 and assessment year 2010-11 and also form 16 for Salary Person.
Categories: Tax Format Tags: CALCULATOR, Income, Tax