Begin sooner rather than later.
Preparing and paying your taxes is both a major hassle and a major priority. People are constantly on a search to make the tax process easier and bills lower.
The sooner you get started, the easier tax season becomes: Federal tax laws and regulations are now more than 10 million words in length, so proactive planning ensures you can take advantage of everything those laws offer.
With this in mind, only one piece of advice really matters – plan early! The sooner you get started, the easier tax season becomes. And with the right proactive measures, you can take effective steps to reduce your tax bill and minimize the financial stress of paying it.
Here are some strategies to follow in preparation for the next tax season:
Minimize Your Taxable Income
Your income determines your tax bill, but different types of income are taxed at different rates. For instance, income in the form of long-term capital gains is subject to a much lower rate than regular income or short-term capital gains. People who are self-employed or subject to fluctuating incomes can also elect to defer some income from one year to another to even out their tax bills. Planning the way you earn gives you more overall control over what you pay.
Of course, as taxpayers, we’re also happy to claim more dedications to minimize that overall income number. One way to do this is to consider things such as charitable giving: it’s been said 34% of wealthy households are motivated to give because of the impact it has on their tax return (Source: Wall Street Journal). Perhaps this number should be higher if only more people understood the value of charitable giving. Whether a donation will have an impact on your bottom line is, of course, completely dependent on your situation, and that decision is best made with expert advice.
Other Deductible Contributions
Giving to a 401K is an ideal way to insulate large portions of your income from tax liabilities. Plus, when you take advantage of employer matching programs, you get free money for retirement. The only catch is that there are stiff penalties if the money is deducted early, but if you are serious about saving that is a non-issue.
Being committed to saving for retirement is beneficial to you individually in more ways than one. The average retirement lasts 18 years, but experts recommend planning for 30. Let’s say monthly expenses will add up to $5,000, you would need $1,060,751 in savings, assuming 6% annual investment returns and 2% inflation (Source: The Motley Fool.com). But, most 50-year-olds don’t even have $50,000 saved! Take control of your retirement and earn annual tax deductions by proactively planning your 401K contributions.
Anyone without access to a 401K program can get some of the same benefits by maximizing deductions to other retirement funds (such as a Roth IRA) or things such as a mortgage or student loan interest. Early planning identifies the largest number of tax savings available.
Utilize Every Tax Credit
Deductions lower the amount of your taxable income, but tax credits lower the amount of your actual tax bill. Some individuals qualify for these credits, particularly those with children and a modest income. There are also credits available for individuals paying for college.
People who are self-employed may be able to take advantage of business tax credits specific to their industry. The surest way to capitalize on every tax credit is to investigate options and qualifications long before tax season starts.
Maintain Your Insurance Coverage
No matter what form the future of health care takes, it’s clear that there will be tax benefits for people who maintain their insurance coverage. Finding a policy that is sustainable and ensuring that it does not lapse are important for both your health and finances. If and when insurance issues arise, be sure to keep your tax burden in mind.
There is never a bad time to begin planning for taxes. Get the information, advice, and guidance you’re looking for from an experienced tax attorney. Contact an attorney at Schloemer Law Firm, S.C., for assistance with all of your tax planning.