There are only two sure things in life – death and taxes. And, tax time is about to roll around once more, as it does every single year. While there’s not much that can be done to prevent you from having to pay personal taxes on your income, the good news is that savvy tax planning can help you save on your tax liability, meaning that you get to keep more of your hard-earned money, and hand over less to Uncle Sam. What should you know about planning for taxation? Let’s take a look at some of the most important tips.
Reduce Your Taxable Income
One of the best ways to reduce your tax liability for the year is to bump up your efforts when it comes to retirement savings. Anything you can pull out of your paycheck and put in a tax-advantaged account (basic IRA, Roth IRA and many others), the less you’ll owe in taxes now. However, understand that there are several different types of retirement accounts. Some of them can be funded with pre-tax dollars, but others are funded with post-tax dollars. Pre-tax funding is the better option if your goal is to reduce your taxes right now.
Don’t Wait to Realize Losses
If you have investments that aren’t performing, don’t wait until the end of the year to realize those losses. Instead, sell them off throughout the year. This can allow you to enjoy a tax deduction at the end of the year when you file. Remember that you’re allowed $3,000 in investment losses every year, and that can help to offset your tax liability. In some instances, it might be enough to bump you into a lower tax bracket entirely. So, if you have underperforming or nonperforming investments, get rid of them throughout the year rather than waiting.
Know Your Tax Bracket
Speaking of tax brackets – it’s vital that you know what your tax bracket will be before filing your personal taxes this year. By knowing where you’ll fall on Uncle Sam’s tax spectrum, you can estimate what you’ll end up paying over the course of the year (whether through regular paycheck withholding if you’re an employee, or through semi-annual filing if you’re a contractor). The breakdown at the time of this writing is as follows:
10%: You earn $0 to $9,325
15%: You earn $9,326 to $37,950
25%: You earn $37,951 to $91,900
28%: You earn $91,901 to $191,650
33%: You earn $191,651 to $416,700
35%: You earn $416,701 to $418,400
39.6%: You earn $418,401 or more
Note: Remember – these breakdowns can and do change every time the government passes a new tax bill. So, it’s important that you verify your tax bracket every year. Otherwise, you could be leaving money on the table, or you could end up owing far more than you expected.
Do You Actually Have to File?
While most of us will have to file personal income taxes throughout our lives, there may be periods where you’re not required to do so. Know whether you’re actually required to file income taxes with the government. This can help you make smarter decisions with your money throughout the course of the year. For instance, if you’re under the age of 65 and earned under $10,350, you don’t have to file income taxes for the 2016 tax year. The same thing applies if you’re over the age of 65 and earned less than $11,900.
There are a few other rules that apply, as well. For instance, if you qualify as head of household, you don’t have to file taxes if you earn less than $13,350 if you’re under 65, or $14,900 if you’re over 65. Married couples don’t have to file if their combined income for the year was under $20,700 for those under 65, or $21,950 for couples where one partner is over 65. The limit is $23,200 for couples where both partners are over 65.
Get All Your Deductions
One of the single most important tips in regard to tax planning is that you need to ensure you’re taking all the deductions available to you. If you can take more in deductions by itemizing than by taking just the standard deduction, then you should do that. Of course, that does mean you’ll need to jump through a few additional hoops, but that can pay off in the long run by lowering your tax bill at the end of the year. You’ll need to make sure you have proof that the deductions you’re claiming are real (receipts and the like). For instance, you can itemize a broad range of expenses, including:
- Charitable gifts
- Expenses related to your job
- Personal property taxes (tax on your home and car, for instance)
- Interest on your home loan
- Expenses related to your investments
- Health care expenses
- State taxes
- Local taxes
Generally, it’s best to track your expenses for the year, and then determine whether you’d be better served by itemizing or by taking the standard deduction. For most people, the standard deduction is ample, but for some, itemizing is not just smart – it’s essential for reducing their tax bill.
In the End
Ultimately, smart tax planning can help ensure not only that you owe Uncle Same less when it comes time to file, but that filing your personal taxes is less stressful. There’s no way to make it an exciting prospect, but the more discomfort you can remove from the process, the better. Working with a reputable tax planner and preparer can also ensure that you’re able to maximize your deductions, and that you’re not leaving any money on the table that could have been saved.