If you are already an adult, a part of adulting life is tax planning. You have to deal with taxation whether you like it or not. A significant part of tax planning is analyzing and arranging one’s financial situation to minimize tax liabilities and maximize tax breaks without breaking the law. Here are some tips for tax planning for any stage of life:
Understand your tax bracket
The tax bracket is the very first thing you need to know, as your bracket will depend on the amount of money you make. Those with higher taxable incomes have higher tax rates. To find out your taxable income, you have to subtract the tax deduction. The government will divide the taxable income into chunks and the corresponding rate.
Know the difference between tax credits and tax deductions
These two terms are oftentimes used interchangeably, but they’re different. Tax deductions pertain to particular expenses that you can deduct from your taxable income, while tax credit gives you a monetary reduction in your tax bill.
Standard deduction and itemizing
The choice between the two can have a huge impact on your tax bill. The standard deduction pertains to the flat-dollar tax deduction. Many taxpayers prefer the standard deduction because the tax preparation is quick. On the other hand, itemizing means, you itemize your tax return, which is a tedious process. The beauty of itemizing is that it works best for people who own a home, especially if you are dealing with mortgage interest and property taxes.
Familiarize popular tax credits and deductions
The possible tax credits and deductions are hundreds, and each has a set of rules that should be followed. Some of them are the capital loss deduction, adoption credit, child and dependent care credit, home office expenses, property taxes, and child tax credit, to name a few.
Know what tax records to keep
It is a must to keep a record of your tax returns and documents as there will come a time when an audit will be required. Keep the most recent ones for up to three years as the IRS has three years window period to audit your return. These documents are necessary, especially if you are going to file a claim or ask for a refund after filing the original tax return.
Know the tax strategies that can cut your tax bill
Don’t you know that there are other tax planning strategies you can do to significantly reduce your tax? These include the following:
W-4 tweaking – It gives your employer information as to how much tax to withhold from your paycheck. To reduce the amount of money taken out of your pay, you have to put other salary details as allowance.
Invest in 401(k) – It is the money you set aside for retirement. Your employer will offer this to you so you could have a tax break for the money you set aside for retirement. It is usually sponsored by employers, although self-employed individuals can opt to invest in 401(k).
Put money in IRA
Aside from the employer-sponsored plan, there are individual retirement accounts you can take advantage of. These are the traditional IRAs and Roth IRAs. With a traditional IRA, it makes your contribution tax-deductible. Still, the exact deductible amount will depend on certain things, such as when a retirement plan at work covers you and your spouse. It also takes into consideration the amount of money you make.
On the other hand, the Roth IRA does not deduct tax from your retirement withdrawals. It asked you to pay the taxes upfront, so it will no longer deduct taxes from your contributions. The earnings that come from your investment will be tax-free.
If you are a business owner, you may be able to make capital investments into equipment and other assets which generate depreciation. The depreciation becomes a tax deduction which reduces your overall taxable income.
Why pay high taxes when there are legal ways to minimize the amount of money you pay the government? You are working hard, and it is a must to enjoy the fruits of your labour. Best of luck on your taxes!