It Is Not Too Early To Think About Reducing Your Income Taxes For Next Year

It Is Not Too Early To Think About Reducing Your Income Taxes For Next Year

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Most of us don't pay much attention to our income tax situation until we're ready to file a tax return. And of course this doesn't happen until well past the end of the calendar year for which we are filing a return.
But this is the wrong approach.

In order to minimize our taxes for any given year we must takes steps early in the year. Good examples are 401(k) contributions and Sec. 125 cafeteria plan contributions for health care and dependent care flexible spending accounts. Often these decisions must be made before the year even begins.

But there are many other things we can do during the year that will have a major impact on our tax liabilities. For example:

1.Home office deductions and automobile expense deductions are based on the extent of your use of your home or car for business purposes during the entire year. You need to think not only about your percentage of business use but also the documentation you are keeping throughout the year. If you wait, it will be too late.

2.Investment income is usually something that accrues throughout the year, not at the end. This is especially true of interest on bank accounts, CDs and money markets. If you don't need that interest, then don't pay taxes on it.

There are plenty of ways to reduce taxes on your investment income, such as fixed and variable annuities, life insurance policies, and tax exempt bonds. But you have to make these tax-wise investment moves early in the year to get maximum tax advantages.

3.Tax planning for investment gains and losses must also be done throughout the year. Perhaps you have sold some property and recognized a taxable gain, and are looking for offsetting investment losses that will reduce your taxes.

You must sell the investments at the right time to maximize tax benefits in this situation. Alternatively, you may want to arrange for a tax-free exchange of like-kind property. Again, this must be done at the right time.

4.IRAs are also something it is good to take care of as early during the year as possible. The earlier you put money in your IRA account the more tax-deferred interest you will learn. Also, your IRA trustee may allow you to make monthly contributions directly from your bank account so you don't have to fund your IRA after the end of the year by writing a big check.

Of course many of us spend the money and then forego the IRA contribution because we can't write a big check all at one. For most people it is easier and better to fund the IRA throughout the year so the contributions are in smaller amounts.

5. Charitable contributions are good tax deductions to start early in the year. It is easier to give your church a contribution of $20 per week rather than writing a $1,000 check late in the year. Clean out your closets, basement and garage and take items to the Goodwill or Salvation Army to maximize your charitable deductions for the year.

6.Now is the time to look at how much tax you are pre-paying in the form of withholding or estimated taxes. The vast majority of American wage earners has too much withhold in payroll taxes and end up getting refunds. If your refund is over $500 you have probably had too much withheld and are making an interest-free loan to Uncle Sam.

Of course if that is what you want to do, then that is your prerogative. But if you do want to make a change, all you have to do is contact your payroll department and ask for W-4 form which allows you to ask for less money taken out for tax withholding.

7.Estimated taxes are what people pay who don't have wages withheld by employers (e.g., self employed people). If you don't pay required estimated taxes you can end up with big penalties. And they have to be paid four times during the year, not at the end of the year.

So this is a great time to predict your taxable income for the year, try to determine your federal and state taxes on this amount of income, and make sure you will be OK with each quarterly estimated tax payment. (Many people just apply last year's tax refund to this year's estimated taxes.)

You may need an accountant to calculate your projected income and taxes for the year and figure out what you should pay in estimated taxes each quarter. In fact, you may want to contact your friendly tax adviser and ask him or her if there is anything you should be doing now to reduce your taxes for this year before it's too late!

About the Author:
Do your taxes need a checkup? Maybe you'd like a second opinion from Leo J. Vidal, JD, MA, CPA, The Tax Doctor. Leo will review your taxes for no charge and give you planning ideas to save money in taxes. You may contact him through his website at http://www.thetaxdoctor.info



Article Originally Published On: http://www.articlesnatch.com


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