By Joe Collinsworth
[Note from Diane: This article was originally written in February 2013, hence the "Tax season is upon us" statement at the beginning of the article.
Because it's important to be aware of your tax situation throughout the year, what can you write off, what can't you write off, when's the best time to purchase X for the best tax advantage, etc. I decided it's a good time to publish this article since we're now half way through 2013 (yikes!).]
Tax season is upon us and it is the beginning of a New Year so this article is two-fold: how to use tax deductions to the utmost on your personal tax return and how to plan for the New Year.
Know that tax laws change constantly leaving professionals and others scrambling to come up with the best ways to keep taxes down while using legal loopholes the government allows. Also know that this is a general article because incomes range extensively and the IRS has limitations and thresh holds on many of the advantageous tax saving strategies allowed.
Let's discuss some of the top strategies for tax saving and planning
- Tax planning is a year-round effort. It doesn't matter how much or little money you make. The goal is to keep as much of it as possible. The people who plan accordingly are the ones who tend to get the most benefit when it is time to file. Once the year ends many of the tax saving strategies are gone for that filing year.
- Maximize retirement plans. If you are an employee take advantage of your company retirement plans to reduce federal taxable income. You can also contribute to IRA accounts for potential deductions on your tax return (unless you decide on a Roth which is a good idea as well). If you are self-employed, then you are eligible for similar deductions many times with less limitations. Self-employed individuals can contribute to retirement accounts, deduct health insurance premiums, H.S.A. contributions, and so forth.
- Consider investing in your own business. Business owners have a little more flexibility than employees do when it comes to deducting business expenses and other items. A business owner has the ability to grow their income exponentially whereas an employee grows theirs in a linear fashion. There are a lot of advantages (of course there is risk) to owning a thriving business that involves tax strategies among other areas.
- Know what deductions you are allowed, if they are limited, and take advantage of them. There are above the line deductions and below the line (i.e. Schedule A). It is critical for you to know what deductions you are able to claim and do so. As long as you keep good records there should be no questions such as with charitable deductions.
- Tax credits are available as well for both businesses and individuals and you should know which ones are available including the rules. Some of the big ones are the child care credit, child credit, work opportunity credit, tuition, and others. These credits can off substantial tax savings. If you own a company and fall under the realms of manufacturing, some construction, and research consider the R&D credit and domestic production activities deduction.
- Turn passive activities into active. Due to the ever-changing tax laws consider if you are able to turn investments into other entities where you do not materially participate into an active activity to take advantage of losses (passive losses tend to get frozen if there is no income to offset them).
- Review your gains and losses from holdings. Do you have substantial losses that you can use to offset substantial gains? You are only allowed $3,000 per year in capital losses so if you have holdings you can take gains on, do so if you have large losses.
- Depending on current market situations, there may be opportunity to invest in tax-free investments such as municipal bonds.
- Setting up for long-term by utilizing trusts, gifting, and other estate planning tactics can provide tax saving strategies especially for the long-term.
- Find a good tax accountant to work with. Successful people know the importance of having good advisors.
Within these tips there are many more. They become very specific to your situation. The point is to start thinking about these aspects in order to ask the right questions and know where to find the answers.
Educate yourself, plan accordingly, and you'll be well on your way to saving more money now and for the long-term.
As a tax accountant for nearly a decade I have seen many of the changes but now more than ever before and it is affecting people from all walks of life.
Back to top of this page: Top Tax Tips To Keep More Of Your Hard Earned Money
Back to: home page