Save Money With these Last Minute Tax Strategies
It seems like the tax man reaches his hand deeper and deeper into our pockets with every passing year. It's never any fun to watch your hard earned money get scooped from your bank account to fund wasteful and often times useless government pet projects. Fortunately, there are a few things you can do to keep more of your income from making the annual trip to Washington and improve your own financial stability in the process. While there are plenty of different strategies for reducing your taxable income, these suggestions are the ones that will not only help to preserve your current financial position, but also to bolster your bank account in the future as well. Here are a few of my favorite tax saving strategies:
1. Fund a Retirement Account â€“ There are many different ways you can do this depending on your personal situation. The most common ones include contributing to an IRA, 401K, or SEP account. If you have taxable income and are under the age of 70 1/2 years old at the end of the tax year, you may be eligible to contribute up to $5,000 to a traditional IRA and reduce your taxable income in the process. By doing so, you not only end up with a lower tax liability for the year, you also establish a source of retirement funds that are able to grow tax free until you reach retirement age. Many employers offer their employees the ability to contribute to a 401K plan. A 401K plan works by allowing you to contribute pre-tax dollars directly from your employer to a retirement account and reduces your taxable income by the amount you contribute up until your reach the established annual contribution limit. If you are self-employed, you can contribute to a SEP plan and allow a significant portion of your self-employment earnings to grow on a tax deferred basis. If you currently make an annual contribution to one of the plans listed above but fall short of the maximum, consider increasing the amount you set aside to as much as you can comfortably afford. The payoff is both immediate in terms of reducing your tax liability for the current year and in the long term in the form of a much more stable financial position as you approach retirement. In some cases, you can make your annual contribution right up until the April 15th tax deadline.
2. Sell Losing Investments â€“ One way you can offset capital gains and or reduce your taxable income for the year is to sell any investments you are currently holding that have lost money. Are you still holding stock from a financial firm that now trades for pennies? Sell it and you can use as much as $3,000 or the loss to reduce your regular income. If you have losses that exceed that amount, they can be carried forward to future year tax returns.
3. Donate Some of Your Stuff â€“ Now is a great time to get rid of all of that stuff you have around the house that you consider junk but might have tangible value to a charity. Start by going through your closet for old clothes you no longer wear and then move on to items such as furniture, appliances, and household items. Every little bit adds up and you can reduce your tax bill while helping others at the same time. As an added bonus, you will be making some extra room in your living space as well! If you decide to donate a significant number of items, you will probably want to take advantage of software such as "It's Deductible" to help you track and accurately value your donations. This will make it much less time consuming when you enter them on your tax return.
4. Start a New Business â€“ You don't have to be 100% self employed to own a business and starting your own business can have many tax advantages. As a business owner, you can deduct up to $5,000 or your start up costs and another $5,000 in organization costs in your first year. If you run your business from home, forming a new company will also allow you to deduct a portion of your rent, mortgage, electric, phone, and internet bills provided that your home is your primary business location and you have an area set aside that is exclusively for business. Small business owners can also deduct business related automobile, insurance, and gas costs as well. Just be sure to carefully document all of your expenses as you will be required to provide support for any deductions you take.
5. Itemize Your Deductions â€“ Many people just automatically take the standard deduction each year to simplify the tax filing process or because they assume that will result in the lowest tax bill. Take the time to add up your deductions to be sure you aren't better off by itemizing. Remember that there are all kinds of different deductions that count here including mortgage interest, state and local taxes, health care related costs, dental expenses, vehicle registration fees, charitable gifts, and losses resulting from theft or natural disaster. In most cases, if you are a homeowner and have a decent sized mortgage payment; itemizing your deductions is the better way to go. Always calculate both options and go with the one that results in a lower tax bill.
6. Check Your Credits â€“ There are plenty of different tax credits available for everything from energy efficiency upgrades on your home to education related tax credits. Tax credits are much more powerful at reducing your bottom line tax liability because they reduce the actual amount of tax you pay on a dollar for dollar basis rather than just lowering your taxable income. Some of the most common tax credits people overlook or forget about include the Child and Dependent Care Credit, Credit for Hybrid Vehicles, and the Earned Income Credit. It is well worth taking the time to review each of these to see if you qualify to take the credit.
While these tips won't relieve you of all of your tax liability, they certainly can take some of the bite out of tax season when applied correctly. The best way to take advantage of these money saving opportunities is to plan ahead. The time to minimize your tax bill for next year is right now. Even if you are far from the next tax filing deadline, you could be making financial changes that could save you a lot of money when the time comes to settle up with the tax man.