Tax advice to avoid debt-ridden waters
Tax time is nearly here - just a few weeks to go - and there are some deductions you need to know about if you are a low to middle income earner. These three tax tips will help you get the best results on your income tax return, pay the least in taxes and get the heftiest refund. These are also tips to inform the money choices you make in 2014 to help you save on taxes. Any money saved can then help you tackle your debts. And that's a good thing. Check it out...
#1 Charitable deduction of cash and goods
This is an important deduction and you should think about all the things you've donated throughout the year. Tithing to your church counts. Many people believe it's wrong to seek a tax deduction for religious donations but think of it this way – does you taking the tax deduction diminish what you gave? The answer is no. Also, if your child's school sponsors drives to support community charities (food and coat drives), the stuff you donate is tax deductible. Stuff you dropped off to Goodwill is as well. Yes, you're supposed to get receipts, but if you keep good records detailing exactly what you donated and don't try and cheat the system, you should be fine.
#2 Casualty loss deduction
With all of the bad weather we've had in North Carolina this winter, it's important to realize that if you suffered a loss that was only partially insured or not insured, you can take a deduction. This includes car accidents and damage to a home or other property you own. You have to look at the value of your property before and after the casualty event and then deduct out any insurance funds you may have received. Then you need to deduct $100 and then 10% of your Adjusted Gross Income. For instance, consider if you make $30,000 and your AGI is $20,000 and your house was damaged in a storm resulting in a $10,000 loss. If your deductible from your insurance company was $5,000, here's how it would go. $10,000 loss - $5,000 insurance payment - $100 - $2,000 ($20,000 x 10%) = $2,900 deduction. All this is done on Form 4864.
#3 Savers credit
This is a great credit but, unfortunately, only 12% of people that qualify for it don't even know it's available. The savers credit is intended to encourage low and middle income earners to save for their retirement. Contributions to a 401(k) or IRA count. You must earn less than $59,000 for a married couple, $44,250 for a head of household filer and $29,500 for a single filer. The maximum deduction is 50% of the first $2,000 you contribute. This phases out based on your income (see table below) and the maximum deduction is $1,000. You'll need to complete Form 8880.
Income thresholds for savers credit deduction
Image source: IRS.gov
#4 Adjust your withholdings
There are two schools of thought on withholdings and refunds. Some people don't mind having extra taken out of their weekly checks if it means they get a nice big refund check. However, if you are deep in debt and may be filing bankruptcy at some point, having a big refund check may not be the best option for you. Plus if you let the government hang on to extra money all year, it's like you're giving them an interest free loan of your hard-earned cash. Instead, increased your dependent count on your W4 to decrease your withholdings so that you don't end up with a refund. If your income is consistent, you can use your 2013 tax return as a guide to see how you need to adjust your withholdings. For instance, if you got a $3,000 refund and are paid bi-weekly, that means you are overwithholding $115 per pay period ($3,000 / 26). To figure out how to adjust your pay, you can use this North Carolina payroll calculator.
Tax savings can give you more room in your budget to deal with your debts and you should always take all the deductions you're legally allowed to – that's why they are there. If you've ever had tax troubles before and have back tax debt, you should know that bankruptcy can help you deal with these in addition to your other debts. Contact the law offices of John T Orcutt for more information.