In today’s world, having an effective tax planning strategy can be crucial to maximizing your deductions while at the same time minimizing your tax liability. Yet while everyone hopes to achieve this, learning how to do so can feel overwhelming to most people. However, once people delve into this process, they find it’s not as complicated as they first thought. By learning some basic steps and being able to spot opportunities when they present themselves, hundreds or thousands of dollars can be saved. To learn more about this, here are some tips to keep in mind.
A Year-Round Process
To take full advantage of all opportunities, you’ll need to work at it year-round. By calculating your estimated taxes during the year, you can make better decisions as to how you can reduce the taxes you will owe. This can include selling stocks that are performing poorly, holding off on selling your home, or contributing more to a flexible spending account.
Keep Accurate Records
If you’ve got your receipts stored in shoe boxes scattered about your house, chances are your tax planning process will not be very efficient. Instead, set up a filing system for your receipts, bank statements, tax forms, and other paperwork that will help you get the most from your planning. And remember, just in case an audit comes your way, keep at least six years worth of records in your files.
Take Advantage of Deductions and Tax Credits
By itemizing deductions and business expenses, as well as taking advantage of tax credits such as the Earned Income Credit, you’ll be able to reduce your adjusted gross income, which could result in you paying less in taxes. Some of the best deductions to be aware of include healthcare expenses, mortgage interest, charitable donations, and property taxes.
Contribute to Your Retirement Account
Whether your employer has a retirement plan or you enroll in one on your own, be sure to make regular contributions, which by the way are tax-free. A great way to build a nest egg, the best accounts to have been a 401(k) or an IRA. And best of all, withdrawals of contributions as well as any investment earnings have done so at retirement will not be subject to federal or state income taxes.
Be Honest and Accurate When Reporting Income
To avoid any problems with the IRS, be honest and accurate when reporting your income. Otherwise, you may face penalties or fines for failing to report income. If you need to correct a mistake later on, just file an amended return using Form 1040-X.
File a Tax Return No Matter What
Even if you don’t owe income taxes, it’s best to file a return nonetheless. Since the IRS has guidelines as to who is required to file a return, you won’t have to worry about violating any rules that could result in financial penalties.
By being organized in your efforts, chances are you’ll find yourself with a winning tax planning strategy when tax season rolls around.