Managing your taxes as an African living in the United States can be a daunting task. However, with the right knowledge and tools, you can stay compliant with all tax regulations and maximise your deductions. In this article, we cover actionable tips on how to manage your taxes in the US, taking into account your unique financial situation as an African.
1. Own An Individual Retirement Savings Account
Retirement savings (IRA) is an effective way to reduce your tax bill. Usually, investments increase tax-free as they grow. This makes it possible for you to withdraw your money after many years at the current (lower) tax rate.
The two most popular types of IRAs are the traditional IRA and the Roth IRA. The main difference between them is the time your contributions get taxed. With a traditional IRA, your contributions are tax-deductible and your earnings do not get taxed until you withdraw the money at age 59.5. While this plan is beneficial, it has its downsides like the inability to deduct your contributions.
On the other hand, every earning you get from Roth IRA contributions are free.
2. Use Your Employer-retirement Accounts Effectively
An employee-sponsored retirement account, such as a 401(k) or a 403(b) is one of the best tax-reduction strategies. It works by deferring your income to minimise taxes. Here is how it helps you reduce taxes:
First, contributions to these types of accounts are made with pre-tax dollars, which means that they are not subject to federal income tax when they are contributed. This reduces your taxable income for the year and lowers your overall tax bill.
Additionally, investment growth within the account is tax-deferred, which means that you do not have to pay taxes on the growth until you withdraw the money in retirement. When you withdraw the money, you will likely be in a lower tax bracket, which means that you will pay less in taxes on the withdrawal.
Additionally, if your employer matches a certain percentage of your contributions, it's like getting free money from them.
3. File Your Tax Return Early
Tax filing is the process of deducing how much tax you are meant to pay or how much refund you should receive. However, the tax filing deadline in the US is April 15, after which defaulters will be penalised. Most times, the penalty for filing taxes late is extra payment-- accrued from increased tax bill, penalties, or interests on unpaid taxes.
You should always file your federal income taxes early enough, even if you cannot pay yet. Besides paying fines, you could lose your refund (if there's any} or be charged for tax evasion (a criminal offense) if you often do not file your taxes.
4. Take Advantage of Tax Credits
Tax credits are one of the best ways to have a lower taxable income. They are dollar-for-dollar reductions from your federal income taxes. A tax credit has more value than a tax deduction because it effectively reduces your tax bills, unlike tax deduction that reduces only your taxable income.
Tax credits can be refundable and non-refundable. They are considered refundable if you didn't owe any taxes and deserve a tax refund. On the other hand, they are considered non-refundable when they eliminate the taxes you owe.
Tax credits in the United States include:
Child Tax Credit
Earned Income Tax Credit
Education-related Credit
5. Use Your Employee Benefits
There are benefits that you are entitled to receive as a staff in a company or business to help reduce your taxes. These benefits work by lessening your taxable income. Some of them include:
Health savings account: A health savings account covers your qualified medical expenses from pre-tax funds.
Transit plans: Transit plans cover your transportation costs with your pre-tax funds and reduce your taxable income
Flexible spending accounts: These accounts, also known as FSAs, help you to cover personal and family needs through payroll deductions from pre-tax dollars
Conclusion
While managing federal taxes as an African in the US can be challenging, these tips can help you get improved tax savings and reduce your liabilities. Although they are effective in reducing your taxes on your employer-provided income, you can also use them to reduce your taxes on capital gains.