Successful American women are now getting ready to prepare their annual tax returns. The number of women-owned businesses now stands at more than 1.1 million nationwide. Women are producing nearly $2 trillion in sales and employ more than 10 million American workers.
Tax planning is one critical area for women seeking to get ahead. This way, females can keep more of their income generated from self-owned businesses and sales.
Read on to learn tax tips every woman should know about. Explore 7 tax tips for women that are certain to reduce their taxable income this year.
1. Save for Retirement
Far too many Americans are kicking the can down the road on retirement savings. In fact, one in four Americans has nothing in their retirement savings account. An even greater number of people, including women, are not saving enough.
Saving for retirement is sound tax advice. Contributions to your 401k or Individual Retirement Account (IRA) are pre-taxes. This means they are deducted from your pay before federal taxes are calculated.
The end result is that you are lowering your taxable income. Increasing your retirement savings contributions may allow you to qualify for a lower tax bracket if planned correctly. An added benefit is that your savings account is allowed to grow without being held back by taxes.
2. Child and Dependent Care Tax Credits
Caring for your loved ones is one of the greatest challenges that female entrepreneurs and workers deal with. How do you balance caring for your family with career aspirations? For decades, women were forced to put their careers on the back burner so they could stay at home with a child.
In the 1970s, Congress made changes to the tax code to help working families. The child and dependent care tax credit helps women pay expenses incurred while they continue to work.
The American Rescue Plan Act increased the tax credit amount. Now, women can receive a $4,000 tax credit for one qualifying child or dependent. The amount doubles to $8,000 if you have two or more children or dependents.
3. Education Credits
Many women want to get ahead by pursuing an education. In some cases, they were forced to postpone their educational goals for family or other reasons. The good news is that Uncle Sam offers generous education tax credits to help you pay for school.
The American opportunity tax credit (AOTC) is worth $2,500. It can be used for eligible tuition, room and board, and other education-related expenses.
The lifetime learning credit (LLC) provides another $2,000 of tax assistance. There is no limit on how many times you can claim the LLC. You remain eligible so long as you are enrolled in at least one academic period at a higher-education institution.
Congress is aware that these credits are not enough to pay for the totality of student tuition and education-related expenses. Many women need to take out private or public student loans to pay for school. You can deduct your student loan interest as well with a 1098-E form.
4. Deduct Expenses From a Home Office
Many female entrepreneurs are starting businesses from home. Whether they are selling or making products, their home is the primary place of business.
While working from home keeps overhead expenses low, it also has tax advantages. You can deduct expenses from your home office to lower your taxable income.
There is a simplified version of the home office deduction. Here, you can claim a $5 deduction for up to 300 square feet. This means it is a $1,500 deduction.
In the regular version of the deduction, you add up all home expenses. This includes big items like the mortgage and rent. Also, utilities such as electricity and internet are also deductible.
5. Side Hustles
More Americans these days need a side hustle to pay all of their bills. One out of every three Americans is doing a side job right now. However, many women are not thinking about how this extra income affects their taxes.
When you work a job as an independent contractor or freelancer, you do not get a traditional W-2. Instead, you may receive a 1099-MISC to capture your income.
It is important to consider this income when planning your taxes. If you have a more traditional position, you should opt to withhold more in federal taxes on the new W-4 form. This is especially important as you are now responsible for the employer portion of Social Security and Medicare taxes.
6. Medical Expenses
You never know when medical expenses are going to play a significant role in your finances. The good news is that you can deduct medical expenses from your taxable income. If you itemize your taxes, medical expenses that exceed 7.5% of your adjusted gross income are deductible.
Many states, like New Jersey, allow you to deduct all of your medical expenses. Either way, it is good financial advice to save all of your medical receipts.
Along these same lines, many women choose to contribute to a Health Savings Account (HSA). This is a way to shield your money from federal taxes.
You can contribute up to $3600 for an individual or $7200 for a family. The major benefit is that the contributions are pre-taxed which lowers your taxable income.
7. Consider Required Minimum Distributions (RMDs)
For older women, it is necessary to pay attention to their age and IRA. When you turn 72 years old, the IRS requires you to take out RMDs.
This means that you have to withdraw a certain amount of money from your retirement accounts each year. The IRS then taxes these withdrawals. It is important to consider these RMDs when you are doing your retirement planning.
7 Important Tax Tips for Women
There are elements of the U.S. tax code that can help women thrive. Generous programs like the AOTC and child tax credit provide thousands of dollars when you file taxes. You should also increase your retirement savings as they are pre-taxed.
Tax planning is so important as you should have an opportunity to retain your hard-earned income. Knowing about every deduction and tax credit helps improve your annual bottom line.
If you enjoyed this article about 7 important tax tips for women and paying taxes, check out our blog for more great financial advice.