If you're looking to reduce the amount of taxes you pay, you're in good company. Most taxpayers welcome the possibility of owing the federal government less money. However, reducing your tax liability requires organization and planning, according to those at Rotfleisch & Samulovitch.

One of the easiest ways to reduce what you owe is to decrease your taxable income through deductions. Tax credits are also an option in many situations. Both individuals and businesses can benefit from understanding available deductions and credits.

Tax Deductions and Credits for Individuals

When you prepare your taxes, you need to have documents ready to prove any deductions or credits you wish to claim. Thus, it's essential to plan well throughout the whole year. Understanding applicable tax deductions and credits will allow you to prepare everything you need.

Deductions

Deductions enable you to reduce your taxable income. They provide legal ways to exempt part of your income from taxation. Reducing your taxable income means you may end up in a lower tax bracket, decreasing the percentage you pay.

Deductions for individuals typically fall into these categories:

  • Education

  • Healthcare

  • Investments

  • Itemized

  • Work-related

Retirement plans offer a way to decrease your taxable income significantly. You may choose to contribute to a program your workplace offers or pay into an individual retirement account. It's essential to study which contributions will give you the best tax reduction benefits.

If you itemize your deductions, you can reduce your taxes by reporting contributions made to qualified organizations. Donations can be in cash or goods. 

You'll want to make sure you understand which charities are eligible before making your contribution. Study up to know what receipts you'll need to prove your donations at tax time.

Credits

Credits grant a reduction in the amount you owe by directly decreasing the tax liability. There are many federal credits available for individuals. 

You may be eligible for a tax credit if you:

  • Have dependents

  • Meet criteria for income and savings

  • Are a homeowner

  • Have eligible medical expenses

  • Pay for education

What Businesses Need to Know About Deductions and Credits

Laws regarding companies differ significantly from those concerning individuals. Complexity increases and many business owners choose to have a professional prepare their taxes instead of trying to do them at home.

Deductions

Deductions for businesses include all the costs of running the company. For example, the following expenses are deductible:

  • Vehicle costs, including personal vehicles used for business purposes

  • Retirement plan setup and contributions

  • Purchase of equipment for the company (like phones, computers, printers, or monitors)

  • Travel costs

  • Telephone bills (including landlines and mobile) when phones are used primarily for business

  • The portion of your utilities, rent, or mortgage that corresponds to use of your home for company purposes

  • Charitable contributions, when your business received a benefit like visibility

Being aware of these deductions will allow you to set aside the documents necessary to prove the expenses incurred. Careful planning can help you significantly reduce your taxable income.

Credits

Businesses can take advantage of credits for:

  • Energy efficiency

  • Electric vehicles

  • Research

You can apply excess tax credits from the current year to a previous year and receive a retroactive refund. You may also opt to carry credits forward for use the next tax year.

Conclusion

Reducing tax liability is a dream most taxpayers share. However, it requires significant research and planning. Understanding applicable laws will give you the best chance of paying less in federal taxes.

Both individuals and businesses can take advantage of deductions that reduce taxable income. Tax credits are also an essential part of reducing the amount you owe. Once you understand the deductions and credits relevant to your situation, you can do the necessary planning to make the most of them.