1: Get Organized
The absolute first step in the process to cut your tax bill is to get organized. That’s right, get organized. While this may sound basic, you would be surprised at how much it cost to be lazy. When it comes right down to it, the reason that most people have a difficult time with taking advantage of all the tax cuts that they are entitled to is because they are too lazy to actually take the time to document and organize their expenses. This can mean a lot of money in the form of lost tax deductions.
Whenever possible, document your expenses. For example, record mileage for business or charity in a book that you keep in your car. When you make charitable contributions, get a receipt. That may sound strange to ask for a receipt when making a contribution to a charity but believe me, they have been asked for it before and they will be asked for it again. The key is to
do it while you’re thinking about it rather than putting it off until later. Chances are you will forget and I can assure you that the IRS will not just take your word for it. When in doubt, document.
2: Contribute the Maximum To Retirement
This is perhaps a bit presumptuous to state that you should maximize your contributions to your retirement accounts. The first step is to make sure that you have actually established a retirement account. If you haven’t, you are missing out on perhaps the greatest tool available today for creating wealth. Not only are the contributions you make into the account potentially deductible, once they are placed into the plan any income generated with these funds is not taxed until they are taken out. At that point, you are only taxed on the amount you pull out, not on the capital gains and growth up to that point. It is truly an amazing way to build wealth and get some great tax relief at the same time. For that reason, you need to contribute as much as you can. Make sure to check with your employer early on in the year to ensure that you are getting the maximum benefit possible.
3: Do Things Early in the Year
There are really two points that I want to make here when it comes to reducing your tax bill. The first is that you need to contribute to your IRA early in the year. Instead of waiting until the end of the year, put your contribution into your IRA in January. While it may not seem that this will make that much of a difference, those few extra months can make a huge difference in the long run. The miracle of compound interest can turn this small amount of money into a large chunk when you do this on a regular basis.
The second point is that you need to sell your stocks and funds early in the year. For maximum advantage, any capital gain deferred from last year should be taken as early as possible. Make sure that you avoid penalties by paying the required amount of estimated quarterly taxes. The benefit here is that you can now invest the money until it comes time to pay the taxes on it which can be over a year from that time. One key thing to remember is to invest these funds in something short-term so that the money will be available when you need it. By taking care of things early you can gain the use of the money for a longer period of time which can mean more in the form of income.
4: Make Gifts to Children and Grandchildren
One of the best strategies for those with substantial assets is to give cash to children and grandchildren to get it out of their estates in order to avoid monstrous estate taxes. The great thing about this is that the gift does not affect the amount excluded from estate taxes upon your death. This can be implemented even more effectively through the use of legal entities such as the family limited partnership.
Remember that the earlier in the year that you make the gift, the better it is for keeping money in the family. Generally, children and grandchildren are in a lower tax bracket than the parents and grandparents. This enables them to pay less in taxes on the gains from that money which often times was going to be given to them eventually anyway.
5: Noncash Charitable Contributions
One of the most overlooked deductions is that of noncash charitable contributions. Did you give that old couch to Goodwill? How about those clothing items you gave to the Salvation Army? Don’t forget to get receipts and deduct the fair market value of those items as charitable contributions.
6: Refinance Points
Due to relatively low interest rates more people are choosing to refinance their home mortgages. Additionally, many of those who did so paid loan points. It’s important to note that you may be able to amortize those points over the life of the loan and generate an additional interest deduction.
7: Properly Calculate Your Basis in Stocks
Perhaps the biggest mistake that people make is not properly calculating the basis of their stock.
What I mean by this is that most people fail to properly take into account all of the various costs and fees associated with their trading. When you buy stock, you’ll pay broker commissions. Even in today’s era of low commission trading, it can still add up. You may also pay transfer fees. These expenses are added to the purchase price of the stock and remain with the stock until sold. Once you sell the shares, make sure to reduce your gross sales price by the amount of these expenses. Remember also to reconcile your sales to the Form 1099B you received from your brokerage firm. This may seem like a small amount but it can add up to a lot of money over a year’s time.
8: Hire Your Children
Remember that self-employed small business owners can deduct the costs of hiring their children as workers. Think about it. Chances are you’re giving them money anyway. How about if you can help them learn some responsibility and get a tax deduction at the same time? If your business is unincorporated and your children are under 18, you won’t be liable for any Social Security or Medicare taxes. Additionally, you can pay each child as much as $6,300 ($4,300 standard deduction plus $2,000 IRA contribution), deduct the sum in full, and they pay zero taxes. How many children do you have? Could this add up to a big chunk of money? You better believe it! What’s even better is that the money contributed into the IRA can grow on a tax deferred basis enabling you to help build wealth for your children and get it out of your estate at the same time thereby lowering estate taxes. This is a truly great strategy.
9: Deduct the Expense of Tax Preparation
One of the expenses that most people fail to deduct and almost always fail to fully utilize is the expense of tax preparation programs. This may come in the form of a book, a software program, a seminar, or even the services of a qualified tax preparer. First of all, it is important to realize that these expenses are fully deductible. Not only that, they can pay for themselves many times over. I often hear people talking about the “expense” that they incur for these services. One of my favorite sayings is that, “It is far more expensive not to pay for tax preparation programs than it will ever be to pay for them.” Whether you plan on doing your own taxes or paying someone to do them for you, be sure to seek professional counsel. Remember, it pays you and it’s fully deductible!
10: Start Your Own Small Business
The greatest tax shelter in the country today is to start and operate your own small business. This may sound strange to many people but it is absolutely true. For many, the thought of having to deal with the pressures of operating their own business seems insurmountable. The reality however, is that it can be the most profitable undertaking you ever become involved in. The reason for this is that businesses can take far more in the way of deductions than individuals can ever dream of. This fact alone makes it essential to start your own business and to start it today!
One of the first questions to be answered is what type of business you will be engaged in. The answer to this is: why limit yourself to only one? It is advisable to involve yourself in multiple businesses in order to produce multiple streams of income. Another tremendous aspect of this is that you can also create multiple business deductions.
Another step is to decide what type of business you will be. There are many different types of business structure that you can choose. Each of these structures has its own set of advantages as well as disadvantages which must be considered.
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