Itâ€™s officially tax time â€“ a time to look back over the previous year with an eye toward maximizing deductions and tax credits and lowering your tax burden.
Do you find yourself cringing at how much you pay in taxes each year though? Youâ€™re definitely not the only one who feels knots in their stomach when reviewing how much in taxes comes out of your paycheck each month. Taxes are unavoidable, but you can minimize the impact they have on your bottom line. While every scenario is different, one thing is universally true, and that is that planning is the key to get the most out of taxes. If you donâ€™t plan, then youâ€™re not going to get anywhere.
The good news is there are simple ways you can start planning right now to save on your taxes this year. Taking action now can make a big difference in the long run. Remember, the less you pay in taxes, the more money youâ€™ll have at your disposal to invest and grow for years to come. Here are seven tax saving strategies to consider implementing this year.
Pay Careful Attention to the Details
Accuracy and punctuality are essential to saving on taxes. If you miss a deadline or make errors on your returns, the IRS may charge you with penalties, interest and fees. Donâ€™t risk it! Save yourself money and a lot of hassle by filing correctly and on time. Have an accountant or an extra set of eyes review your returns for errors before you file if you need help.
Itemize Your Tax Deductions
The IRS sets standard deduction limits each year, i.e. fixed dollar amounts that reduce the income youâ€™re taxed on based on your filing status. For example, the standard deduction in 2016 for single individuals and those married filing separately was $6,300. Although claiming a standard deduction can make filing easier and save you from needing to save and track receipts for costs such as medical expenses and charitable contributions, you may be able to save more money by filing itemized deductions.
Consider filing with itemized deductions if your total costs for items such as the below are greater than the standard deduction amount for your filing status.
- Uninsured medical and dental expenses
- Paid real estate taxes and mortgage interest
- Theft losses or uninsured casualty expenses from floods, fire, wind
- Qualified charitable contributions
- Unreimbursed expenses as an employee
- Business expenses if youâ€™re self-employed
Keep Your Withholding Amounts up to Date
Anytime you have a lifestyle change such as marriage, divorce or having a baby, you should notify your HR department and submit an updated W-4 form. Keeping your tax withholding amounts updated can help you better manage your cash flow throughout the year. For example, withholding too little could lead to a surprisingly large tax bill when you file your return. On the other hand, if you withhold too much you could miss out on the earnings potential of money thatâ€™s temporarily tied up with Uncle Sam.
Utilize Tax-Favored Accounts
Are you proactively using tax-advantaged accounts? There are many different types of accounts you can contribute to that provide tax and savings benefits such as traditional IRAs and 401(k)s. Health savings accounts (HSAs) and 529 plans also offer tax benefits for medical expenses and college costs respectively.
Consider Investing in Tax-Free Bonds
If youâ€™re looking for a way to invest your cash, you may want to consider municipal bonds, also known as munis. Municipal bonds are a form of debt issued by states, cities or other local government entities. Unlike most stocks and ETFS, munis are typically exempt from federal taxes and state taxes when purchased by residents.
Evaluate Moving to a Tax-Friendly State
Relocating to a new state isnâ€™t feasible for everyone, but it is worth considering if you have flexibility and currently live in a highly taxed state such as California, New York, New Jersey or Connecticut. Popular tax-friendly states include Delaware, Florida, Georgia and Nevada. Take a look at the map below which highlights states that donâ€™t have income taxes.
Invest in Property If You Can Afford It
If you have a mortgage, eligible interest payments can reduce your taxable income each year until your mortgage is paid off. Once you own property, be sure to keep detailed records of any renovations, repairs and improvements made. Typically, if the work is done has a useful life longer than one year, the money you spent can be included in your adjusted cost basis when it comes time to sell. A higher cost basis can help reduce your capital gains on the sale price.
Utilize Tax Savings to Invest in Your Future
Benjamin Franklin warned us more than 200 years ago that paying taxes is unavoidable, but utilizing some of the simple strategies listed above can help reduce your tax liability. The earlier you can start increasing your savings on taxes and the more you invest, the greater your chances are for a better financial future.