Tax Planning Basics: Four Ways To Reduce Your Taxes
Tax planning is an important component of your overall financial plan. By utilizing Strategic Tax Planning throughout the year, we can assist you in reducing the taxes you pay – and to keep more of what you have and what you earn.
Strategic Tax Planning is not accomplished in isolation. It is driven by your overall financial goals and integrated with your total financial plan. By developing and implementing appropriate strategies to lessen or shift current and future tax liabilities, you can improve your prospects of meeting long- and short-term objectives.
Don’t be fooled by tax professionals and advisors who focus on “tax-loss harvesting” and “loopholes” as their primary tool to reduce your taxes. We use tax-favored investment strategies that are based on tax code and tax law, not loopholes. Some of the tax law & tax code strategies we use have been in effect since 1914! Invest in yourself and your family, not the IRS.
Keep in mind that tax laws are often complex and frequently change. As a consequence, you should consult your tax professional before making investment and tax decisions.
Here are four basic ways to reduce your taxes.
The goal of tax planning is to arrange your financial affairs so that you pay as few taxes as possible, and so the taxes you do pay are as low as possible.
Reduce your income.
Your adjusted gross income (AGI) is a key element in determining how high your taxes will be. Several other things depend on your AGI (or modifications to your AGI) – such as your tax rate and various tax credits. AGI even impacts your financial life outside of taxes; banks, mortgage lenders, and college financial aid programs all routinely ask for your adjusted gross income. It is a key measure of your finances.
Because your AGI is so important, you may want to begin your tax planning here. What goes into your AGI? Your income from all sources minus any adjustments to your income. The higher your total income, the higher your AGI. As you can guess, the more money you make, the more taxes you will pay. The number one way to reduce the amount of taxes you pay is to reduce your income. And the best way to reduce your income is to contribute money to a 401(k) or a similar retirement plan at work. Your contribution reduces your wages and lowers your tax bill.
You can also reduce your AGI through various adjustments to your income. Adjustments are deductions, but you don’t have to itemize them on the Schedule A tax form. Instead, you take them on page one of your 1040 tax form. Adjustments include contributions to a traditional IRA, student loan interest paid, alimony paid, and classroom-related expenses. A full list of adjustments can be found on Form 1040, page one, lines 23 through 34.
The best way to boost your adjustments is to contribute to a traditional IRA. Two of the best ways to reduce your taxes are to save for retirement through a 401(k) at work or through a traditional IRA. Contributions to these retirement plans will lower your taxable income and, subsequently, your taxes.
Increase your tax deductions.
Taxable income is another key element in your overall tax situation. Taxable income is what’s left over after you have reduced your AGI with deductions and exemptions. Almost everyone can take a standard deduction, and some people are able to itemize their deductions.
Itemized deductions include expenses for healthcare, state and local taxes, personal property taxes (such as car registration fees), mortgage interest, gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses. One key tax planning strategy is to keep track of your itemized expenses throughout the year using a spreadsheet or personal finance program. You can then quickly compare your itemized expenses with your standard deduction. You should always take the higher of the two.
Your standard deduction and personal exemptions depend on your filing status and how many dependents you have. You can increase your standard deduction and personal exemptions by getting married or having more dependents. But the best strategies for reducing your taxable income are to itemize your deductions, and the three biggest deductions are mortgage interest, state taxes, and gifts to charity.
Take advantage of tax credits.
Once you’ve adjusted your taxable income, you can focus on various tax credits. There are tax credits for college expenses, saving for retirement, and adopting children.
The best tax credits are for adoption and college expenses. Not everyone is in a position to adopt a child, but most people can arrange to take a college course or two. There are two education-related tax credits: The Hope Credit is for students in their first two years of college.
Branch Out As An Entrepreneur
Every time someone takes on a new business, there is a risk associated with it, but the tax breaks make it worth taking the plunge. Whether you are starting this business to run after your primary job or if you are taking a leap into the unknown, the tax breaks at both the state and federal levels can be satisfying. Deduct costs and expenses associated with the business to your taxes. Make sure to have receipt documentation of these expenses, whether it is material purchases or a bill for utility services. A tax break is waiting for you on your income taxes.
If you are working your business out of your home, you are able to take advantage of tax breaks related to your home expenses. Your office space and any utilities that are used in that space where you are working can be applied for tax deductions, further reducing your income taxes annually. Even if your business has not been very profitable the year before, the payoff in tax breaks may be enough to keep you pursuing your business in the future.
If you have a business with employees and offer health insurance as a benefit to them and yourself, you could qualify for an additional tax deduction that will lower your income tax at the state and federal levels. Consider the various tax breaks that come with owning a business as you get started and start to implement benefits programs and employment options.
Tax Planning: The Most Critical Component To Your Financial Security
When you combine direct income tax, which is the amount of tax you pay on your annual income, with indirect tax, meaning everything from GST, sales and super taxes, to capital gains, fuel tax and all the different stamp duties, your tax burden adds up to the single largest expense you will ever pay and the biggest drain on your wealth creation potential.
Once taxes are paid, your remaining net income is all you have to cover your home loan or rent, investments, living expenses, your children’s education, travel, and entertainment. Meanwhile, inflation, which has now surpassed wages in growth, brings that cost of living up year over year – stripping your purchasing power even further.
That’s why strategic tax planning is a critical component to getting ahead. You can realise rapid results with annual tax savings that compound year over year.
Tips for Strategic Tax Planning and Filing
It’s February, which means tax time is just around the corner, and you’ve probably seen lots of articles quoting Benjamin Franklin’s historic quip, but taxes don’t have to be as bad as all that. Whether you’ve already started your taxes, outsourced the entire process to a tax professional, or are waiting until the last minute, small things make a big difference when it comes time to do your filing.
These seven strategic tax tips have been selected to help you get the most possible out of your tax filing. So, instead of dreading doing your taxes, maybe this is the year where some extra research could help you save a bit more. Or perhaps you’ll set a goal to finish your taxes earlier than you’ve ever finished them before. So, grab the tax bulls by the horns! And use these seven strategic tips to potentially make your life easier.
Tip #1: Review Last Year’s Documents First
Review all of your tax documents from last year to make sure that everything has been reported correctly. Check your W-2s, 1099s, and other income documents to confirm that there aren’t any obvious errors in the way your income has been reported. If there are problems, you’ll need to contact the company/issuer of the documents.
Tip #2: Consider Requirements for Your Investments
When it comes to reporting your investment earnings, organization is key. The IRS requires that you report your interest and dividend categories separately. This information will be easier to find if you have your earnings statements available from all of your investment accounts. Yearly statements may contain all the information you need, but it doesn’t hurt to keep your monthly or quarterly statements in a file folder just in case you need more detailed information while doing your filing.
Tip #3: Reduce Your Taxable Income with a Traditional IRA
If your 2016 Modified Adjusted Gross Income (MAGI) is $98,000 or less (joint) or $61,000 (single), you may be able to fully deduct contributions to a Traditional IRA. A higher income than that may just mean partial deductions, so check with a tax professional. Many taxpayers can make contributions to a Traditional IRA up until the time you file (due date April 18, 2017). The tax-deductible contribution limit for the 2016 tax year is $5,500. For those who are age 50 and over, the limit is $6,500.
Tip #4: Don’t Forget Charitable Donations
Charitable donations are often an effective way to reduce your taxable income for a given tax year, with the added benefit of helping those in need. According to the IRS, charitable contributions are only tax deductible if you itemize the deductions.1 Charitable contributions must be made to qualified organizations in order to receive a deduction on your taxes (if you want to check if the organization qualifies as an “exempt organization,” you can check here: https://www.irs.gov/charities-non-profits/exempt-organizations-select-check). To deduct your charitable contribution, you’ll need to provide a bank record or written communication from the charitable organization that includes the name of the organization, the amount, and the date of the contribution. Don’t forget about property you may have donated as well – that may count as well.
Tip #5: Include Medical Expenses
Another important tax deduction is medical expenses, but you’ve got to have the documentation to back up your claims. Your unreimbursed medical deductions will need to total more than 10% of your adjusted annual income, and according to the IRS those aged 65 or older are exempt from the increase (meaning the expenses need to total a lesser 7.5% of adjusted annual income).
There are many commonly-overlooked medical deductions you can take, but you’ll need to keep track of your records. With proper records, you may be able to claim the following:1
- Travel expenses to and from medical appointments and treatments
- Insurance payments from income that has already been taxed
- Medical treatments that aren’t covered by your insurance, such as contact lenses, false teeth, and hearing aids
- Laser vision corrective surgery
- Medically necessary items prescribed by your physician such as adding a humidifier to your home’s HVAC system
- Costs associated with controlled substance rehabilitation treatments
As with charitable donations, keep track of these records throughout the year, either in a paper folder or an electronic file. When it’s time to file your taxes, you’ll have everything you need in one place.
Tip #6: Track Your College Education Expenses
Work with a tax professional to deduct qualified expenses when it comes to spending on higher education for your family members, and make sure that any distributions from your 529 college savings plans match-up with the expenses incurred in the same calendar year. It could make sense to keep an Excel spreadsheet or some other running tally on all college-related expenses, from tuition to books to room and board.
Tip # 7: File Early to Avoid Fraudsters
Fraudsters are sometimes known to file fake returns in a person’s name…before that person has the chance to. This way, they can collect the refund while it’s still available. According to Fidelity Investments, one of the best ways to safeguard against this type of fraud is by filing your returns as early as possible. If you file a legitimate return before a fraudster tries to file one in your name, the fraudulent return gets rejected.