Are tax filing woes quickly becoming the bane of your existence? Have you let the financial year pass by without considering your potential tax burden and how to alleviate it? Unfortunately, many individuals fall prey to last-minute scrambling when it’s often too late to make any changes.
As H1B visa holders, Indian professionals are taxed the same way as US citizens and can claim certain deductions and credits. However, lowering your tax bill is not as simple as it seems.
Efficiently managing your finances requires the implementation of tax planning strategies. These strategies, if well-timed and well-executed, help individuals avoid tax penalties.
The road to filing taxes is long and necessitates constant vigilance and planning all year long. We take you through some essential tax planning strategies for individuals to implement them to make tax season easier.
1. Understand your tax bracket
You can effectively forecast and plan financially to know which tax bracket you fall into. It is essential to understand that the United States has a progressive tax system—taxable incomes are usually not the same as your total income.
The difference is determined by, and due to, your filing status and the deductions you claim. Hence, the strategies you implement will also be determined by your taxable income figure.
2. Documentation: know what to keep and what to throw
Undoubtedly, the most critical component of tax filing is organized documentation. Having a record of expenditures and statements for the current financial year is as essential as having copies of previous tax returns that date back at least three years.
Why? The possibility of audits. The IRS has three years to decide whether to audit an individual or not. For Indian H1B holders who are taxed on their global income (income earned from investments back home), tax filing should be treated with extra caution, and documentation must leave no room for ambiguity.
3. Tax savers: deductions and credits
Tax deductions and credits are powerful tools and can significantly reduce tax burdens when used correctly. Deductions lower your taxable income, while credits reduce the tax value itself, giving you a larger refund. Below are some of the most popular ways to use these tools to get a more significant tax break:
- Retirement planning
Growing your nest egg for retirement while reducing tax bills may sound too good to be accurate; but individuals can maximize savings by making contributions to retirement funds.
Whether you choose to participate in 401k or IRA plans, all contributions up to $6,000 for those younger than 50 lower your taxable income.
- Kiddie taxes and child tax credits
For individuals with kids, children’s unearned income (investment-type income) above $2,200 must be taxed using their tax rates, and parents are advised to take note of the same.
Additionally, parents could claim child tax credits on their taxes, which means receiving up to $3,000 per qualifying child above the age of six and up to $3,600 for kids under six.
- Educational expenses
Tuition fees, supplies, and other expenses made on classes or courses that improve skills related to your job may be deducted from your taxable income, thereby saving you money.
- Health insurance and medical expenses
Medical bills can be financial drainers. So while filing for 2021, make sure to itemize all expenditures that are greater than 7.5% of your adjusted gross income, as they can be tax-deductible.
- State income and local tax deductions
Individuals can deduct amounts paid either toward state income taxes or local and sales taxes from their taxable income. The deduction is capped at $10,000 and provides a sizable tax break.
- ‘Other dependent’ credits
Aside from claiming credits for dependent children, individuals also have the option of claiming credits up to $500 for anyone they may be supporting financially.
- Flexible spending accounts & health savings accounts
FSAs and HSAs are valid accounts to have, especially when taking care of your health. So catch up on doctor’s visits, and don’t let your FSA balance go to waste.
As for HSA’s, contributions up to $3,600 for individuals are tax-deductible.
4. Reevaluate filing status and change tax withholding allowances
The IRS recommends yearly tax withholding allowance adjustments to ensure the taxes withheld from your paycheck are best suited to your current needs.
Revisiting your W-4 to check filing status and tax deductions might be a good idea if you’ve experienced any of the following the past financial year:
- Getting married
- Having children
- Salary increments or reductions
- Changing jobs
5. Harvest losses
This year, it may be profitable for individuals who jumped on the investment bandwagon to minimize capital gains. You can do so by offsetting gains with losses worth up to $3,000, thereby reducing your taxable income.
6. Donate to charity
Charitable giving is a noble action, and individuals are further incentivized to continue since donations are tax-deductible. Any donations made to a 501(c)(3) registered charity are deductible.
For 2021, there are no limits placed on the number of cash contributions made for those that itemize their deductions. For individuals who claim a standard deduction, the deductible is $300.
7. Work with a professional
Organizing and optimizing your tax returns is no easy task, especially when there are so many things to consider being an H1B holder.
However, handing over the reins and collaborating with seasoned tax planners and professionals can make all the difference to how much money is put back in your pocket.
Having the right people analyze your finances helps you make more intelligent and strategic decisions all year round, and we at AOTAX do precisely that.
Our team has been in the business of assisting Indian IT professionals for close to twenty years. You can trust us to help you get the best returns. So sign up for free today!