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How Can an Average Joe (or Jane) Reduce Their Tax Burden?
There are lots of things you can buy if you’re rich or in charge of a big corporation. Private planes, for instance; private yachts; private limousines; pretty much any form of luxurious private travel.
But it can also allow you to, in essence, "buy" a lower tax bill. The more money you have—whether you're just one rich person or one mega-rich corporation—the more of that money you can spend on high-end accountants who are experts are lowering their clients' tax burdens.
But what about you? Unless you’re reading this on a private plane, you probably can’t afford too many fancy accountants, which means a large tax bill will be hitting you even harder. And with changes from last year's tax act taking people by surprise during the 2019 tax season, you could be hit even ... harder-er.
So what can you do about it? We spoke to the experts to find out!
Take advantage of an IRA or HSA.
There are methods the average person can use to lower their tax burden. Unfortunately, it may require a bit of math and time investment.
“The average Joe can take advantage of tax deductions that the wealthy may not be able to, such as a contributing to a Traditional IRA,” explained Peter G. Miles, President and Financial Advisor at St. Croix Wealth Management. “Many wealthy individuals make too much income and are unable to take advantage of Traditional IRA contributions.
"The most tax advantageous account is a Health Savings Account (HSA). If an individual or family has a high deductible health plan, they can take advantage of health savings accounts and their contributions are tax deductible. If the money is used for a qualified health need there are not taxes owed on those withdrawals.
“Pay yourself first! If you have a medical bill, make the contribution to the HSA and turn around and pay the medical bill from the HSA. By saving for education, you may receive tax benefits on your state tax return. Each state has its own benefits, so it varies state to state.”
“Most tax return software has the ability to input different scenarios to maximize your tax returns. Also by working with a financial advisor or a tax preparer, they may be able to point you in the right direction and answer any questions on tax advantageous accounts.”
You should also research which tax credits you may be able to take advantage of.
Look for extra credits.
Depending on your specific situation, there are likely additional credits or deductions you’ll be able to take advantage of.
“A new dependent credit is here,” advised tax expert Manisha Hansraj, a marketing specialist for Rapid Filing Services. “If you want to claim a non-dependent, (meaning someone who is not a qualifying child under age 17) you can do so and receive $500 for this credit. The non-dependent must be either a full-time student or disabled. The Child Tax Credit also (CTC) increased to $2,000 per child.
“Whether you’re thinking of buying a house or if you’re currently a homeowner, the mortgage interest deduction is for you. Under the TCJA tax reform, if you purchased or improved your home after December 14, 2017, you can deduct your mortgage debt to $750,000.
"That being said, for taxpayers who purchased their home on December 14th or earlier can deduct interest based on the old cap which was up to $1 million in debt. Although the interest on home equity loans will no longer be available in 2019, you still have a chance to take the home mortgage interest deduction.
Do you own a small business?
While small business owners won’t have access to the offshore tax havens giant corporations can use to lower their tax burden, that doesn’t mean they’re totally without options.
“A small business owner has plenty of resources at their disposal including tax books, self-help guides, IRS memos, and US Tax Court cases,” offered Thomas J. Williams, tax accountant and co-founder of Deducting the Right Way. “Mastering your bookkeeping, accounting, and tax issues won’t happen overnight—learning the ropes demands a significant investment of time and dedication.
“First, you must make peace with the fact you’ll never have the extensive knowledge gained by a licensed accountant who has spent years earning degrees and taking exams which means you will pay for consultations at one point or another.
"Second, know that you will become frustrated with the subject because it is dense and continually changing. Last, avoid free forums that often contain bad advice from just about anyone with a computer and an Internet connection; stick to websites and applications used by professionals.”
But what if you are the business?
“For self-employed taxpayers, take advantage of your business expenses even if you work from home,” Hansraj suggested. “This means that you should keep all documentation of your expenses from office supplies, client dinners, travel, rentals, licenses, and any other expenses that serve a purpose for your business.”
Use that extra money wisely
Hopefully, this advice will help during tax season. Maybe you’ll even get a nice refund! But if so, what are you going to do with that extra money? Because, while it might be tempting to splurge, you should take a hard look at your finances and see if it that money can be better applied elsewhere.
Namely, you should take a look at your debt load and your savings. Too much debt—especially higher-interest consumer debt—hurts your credit score, while meager savings will leave you vulnerable the next time a surprise bill or unexpected financial shortfall strikes.
Lowering your tax burden means putting more money back in your pocket. The smarter you are with how you spend that money the more likely you are to have full pockets in the future.
Manisha Hansraj is a Tax Expert, Content Creator, and Marketing Specialist for Rapid Filing Services (@Prior_Tax). She has over 3 years of experience and well versed in the tax changes as well as preparing prior and current year tax returns. RFS is an online tax preparation company to file prior and current year tax returns nationwide.
Peter G. Miles is the President and Financial Advisor at St. Croix Wealth Management (@stcroixwm), which he founded with the stated mission of helping all people navigate their financial journey. After attending Minnesota State University, Mankato, where he studied aviation, the course of Peter's life changed following the events of September 11th, 2001. He changed careers and went back to school to earn his Uniform Combined State Law Examinations Series 66, General Securities Representatives Series 7 registration, along with the Minnesota Life and Health Insurance License. He has been helping people navigate their financial journey ever since. Peter lives in Woodbury, MN with his wife, Sarah, and their two daughters; Evelyn, age 7 and Amelia, age 5.
Thomas J. Williams, EA is a tax accountant, author, and co-founder of Deducting the Right Way℠, an online resource for small business do-it-yourselfers. He enjoys helping small business owners gain confidence to handle their business finances and has implemented his strategies for nearly 20 years with domestic and international clients.