You might be paying a significant portion of your earned income in taxes.
But, what if we were to tell you that there are numerous simple — yet effective — ways to save you money on taxes? You might not believe us yet, but wait until you finish reading this article!
Here are the top 8 tips on how you can reduce the tax you pay by reducing your total taxable income.
Let’s get started, shall we?
1. Keep personal and business expenses separate
It’s important to keep your personal and business expenses separate in order to reduce your taxable income. To do this, we recommend getting a business credit card and using it only for business expenses.
This will make it much easier to keep track of your expenses and ensure that you’re only including business-related expenses on your taxes.
If you use your personal bank account to pay for a business expense, make sure you reimburse yourself later from your business account.
Setting up a business bank account is one of the most basic tasks that every sole trader should do early on.
Read “Business Basics for Sole Traders” from Westpac
2. Don’t forget about deductions!
Deductions are one of the most commonly missed opportunities to reduce taxes. Make sure you’re taking advantage of all the deductions that you’re entitled to!
These are expenses that are necessary for your business, such as office supplies, internet, phone expenses, and more.
Remember, you can only deduct the portion of the expense that is business-related. So, if you spend $100 on office supplies and $20 on personal items, you can only deduct $80.
Another thing to keep in mind is that you can only deduct expenses that have been paid. So, if you have unpaid invoices, you won’t be able to deduct them until they’ve been paid.
If you’re unsure about whether or not you can claim a deduction, ask your accountant. They will be able to give you the most accurate answer.
3. Invest in yourself
Investing in yourself is one of the best ways to reduce your taxable income. This can be done by taking courses, attending conferences, and buying books related to your business.
You can deduct the cost of these expenses from your taxes as long as they are considered “ordinary and necessary” for your business. This means that the expense must be common and accepted in your industry and it must be helpful to your business.
For example, if you’re a web designer, you can deduct the cost of a course on web design from your taxes. But, if you’re a web designer who takes a cooking course, you can’t deduct the cost of that course because it’s not related to your business.
4. Save more for your retirement
Saving for retirement is another great way to reduce your taxable income. There are many different retirement plans available, such as a 401k, IRA, or SEP IRA.
Each type of retirement plan has different rules and regulations, so be sure to speak with your accountant or financial advisor to find the best option for you.
Generally speaking, retirement plans allow you to contribute a certain amount of money each year, which is then deducted from your taxable income. The money that you contribute grows tax-free until you retire, at which point you will pay taxes on the withdrawals.
If you don’t have a retirement savings plan, now is the time to start one!
5. Get a medical insurance plan
You can deduct the cost of your health and dental insurance premiums from your taxes. However, there are some limits to this deduction. For example, you can only deduct the portion of your premiums that is paid with after-tax income.
Additionally, if you have a health savings account (HSA), you can only deduct the contributions that you make to the account.
Still, this is a valuable deduction that can save you a lot of money on your taxes.
6. Give to charity
Giving to charity is a great way to reduce your taxable income. You can deduct any donations that you make to eligible organizations.
There are some restrictions on this deduction, so be sure to do your research before making any charitable donations.
7. Submit tax returns on time
This one is pretty self-explanatory. Make sure you file your taxes on time to avoid any penalties or interest charges.
For online submissions, the deadline is usually April 15th. However, if you’re mailing in your return, be sure to check the postmark date to make sure it’s on time.
If you’re unsure about anything, don’t hesitate to ask for help. You can speak with your accountant, financial advisor, or the IRS for more information.
8. Keep a track of your mileage
If you use your car for business purposes, you can deduct the cost of your gas and maintenance from your taxes. You can also deduct a portion of your car payment, insurance, and depreciation.
To claim this deduction, you must keep track of your mileage.
Here’s everything you need to know about tracking your mileage for a tax deduction.
Conclusion
These 8 tips are super easy to follow and they will save you a lot of money on the taxes you pay. Try them and see for yourself!
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