Planning your taxes: 6 core strategies for beginners
Do you think you are paying too much in taxes? You are not alone. According to a 2016 Gallup Poll, 57% of Americans believe that their payments are too high, while 47% say their tax liability is unfair.
Even if you don’t fall into any of the above categories, the truth is that no one likes paying taxes, but, it’s inevitable. Thankfully, there are several ways to reduce your bill.
This article will provide a brief overview of tax planning for individuals, including common strategies for reducing your payables.
What is tax planning?
Tax planning is the process of looking at your financial situation and coming up with strategies to minimize your payables. This can include things like investing in certain types of accounts, claiming certain breaks and deductions, and structuring your affairs in a certain way.
You don’t have to be an expert to do financial and tax planning ” says Erik Miller, independent tax advisor in Portland.
“There are plenty of resources out there that can help you figure out the tax strategy that works for you. But it makes more sense to work with a financial advisor or professional. They can provide the tax planning advice that fits your unique circumstances.”
What is the purpose of tax planning?
Most people think this is simply a way to minimize the amount of money paid to the government. While that is certainly one way to look at it, it’s not the only one. Here are a few other purposes:
- To ensure you are complying with all available laws
- To help you maximize your deductions and credits
- To help you plan for upcoming changes in the IRS code
- To help you manage your overall financial picture
6 key tax planning strategies for beginners
Here are a few key strategies that can help you save money when filing your return.
1. Know your tax bracket
The first step in personal tax planning is knowing which bracket you fall into. There are seven brackets, ranging from 10% to 37%. The rate you pay depends on your income and filing status. Generally, the higher your income, the higher your rate will be.
2. Make use of credits and deductions
One of the most important tips for tax planning is taking advantage of credits and deductions.
There are two types of deductions: standard and itemized. Standard deductions are a set amount that you can deduct from your payables. The amount varies depending on your filing status. Itemized deductions, on the other hand, allow you to deduct specific expenses, such as medical bills or charitable donations.
Which deduction you should take depends on your situation. If your standard deduction is higher than your itemized deductions, then you should take the standard deduction. If your itemized deductions are higher, then you should itemize your deductions.
Even better, credits lower your payables dollar for dollar.
3. Know what records to keep
Keeping good records is essential for effective tax planning. You should keep records of all your income, expenses, and deductions for 3-7 years or until the period of limitations for that return expires.
This will help you keep track of your liability and ensure that you are taking all the deductions and credits you are entitled to.
4. Put money in a 401(K)
One of the best retirement planning advice you can get is to contribute to a 401(k) plan.
401(k) plans are retirement savings plans that offer tax-deferred growth. This means that the government won’t take anything from the money you contribute to your 401(k) or the earnings on those contributions until you withdraw the money at retirement.
This can also be part of your salary tax planning as it helps to lower your payables for the year.
5. Adjust your W-4
A key tax planning example is the W-4 form tweak. This is the form you fill out when you start a new job that tells your employer how much should be withheld from your paycheck.
If you claim more allowances on your W-4, a smaller bill will be withheld from your paycheck. Conversely, if you claim fewer allowances, you will have a higher withholding.
6. Capitalize on depreciation
Depreciation is an accounting method that allows you to spread the cost of an asset over its useful life.
When filing your return, you can depreciate the cost of a business asset, such as a computer or office furniture, over years. This depreciation can be used to offset other income, which can reduce your liabilities.
Is hiring a tax professional worth it?
The tax planning process can be difficult and time-consuming. That’s where hiring a professional can come in handy. A pro can help you save time and money by doing all the hard work for you.
Of course, if you are preparing a simple return, you probably don’t need to hire a pro. However, a professional can make sure that you are taking advantage of all the available credits and deductions, and can come up with a tax reduction strategy to help you maximize your financial efficiency.
The final word
These are just a few of the key strategies that can help when talking about taxes for beginners. By taking advantage of these strategies, you can reduce the amount of money the government collects every year and enjoy some savings.
Remember though, there are a lot more strategies that can help you make the most of the inevitable financial burden but you need a professional to help you achieve this.
This is where we come in at Interactive Wealth Advisors. Let us work with you to create a tailored plan for your purposes so that you can legally reduce the amount of money you pay every season.
Get in touch for more information.
