SAVE MONEY WITH SMART TAX PLANNING
Part of wealth accumulation is understanding the tax system. As a teen, my dad started teaching me the ways of minimizing taxes with one’s own business. If you have your own business, certain expenses are tax deductible and can save money on your annual tax bill. It’s crucial to pay the government their due, just no more. Keep up with the tax law and potential deductions to have more funds for saving and investing.
THE FISCAL CLIFF IS LOOMING
Talk of the fiscal cliff is everywhere. What does the fiscal cliff have with building wealth? The short answer, a lot.
According to the NY Times, “ The term refers to more than $500 billion in tax increases and across-the-board spending cuts scheduled to take effect after Jan. 1 — for fiscal year 2013 alone — unless President Obama and Congress reach an alternative deficit-reduction deal.”
In short, unless the congress gets to work and extends or changes the tax law, the tax cuts put into place under the Bush administration are gone. Here’s how your taxes will look if nothing is done:
If the government does nothing, then most Americans will be subject to higher taxes. If you have a job, federal income taxes will go up for almost all. For all you dividend investors out there, hunting for yield, dividends will be taxed at ordinary income rates. If the past is any indicator, it’s likely some of these tax increases will be tempered, so don’t panic just yet. In spite of future tax uncertainty, consider these strategies to avoid a potential tax lashing in 2013.
5 TAX PLANNING TIPS
1. SELL YOUR WINNERS
Take capital gains now, while capital gains tax rates are lower.
2. SAVE CAPITAL LOSSES FOR LATER
They will be worth more when tax rates are higher. If you plan to sell a stock or mutual fund with a loss, wait until next year instead of this year.
3. DIVERT FUTURE INCOME TO PRESENT
If you own your own business or can control bonuses, take the money in 2012 rather than 2013, and save a few points in taxes due. If your older and planning a distribution from a retirement account, take it this year instead of next. (If you’re over 70 1/2, you’ll still have to take your required minimum distribution in 2013).
4. DELAY TAX DEDUCTIONS INTO 2013
You might want to make your annual charitable tax deductions next year, when they’ll be more valuable. Consider pushing any tax deductible payments into next year if possible.
5. SAVE TAXES BY CONTRIBUTING TO TAX ADVANTAGED RETIREMENT ACCOUNTS
Contribute as much as possible to your workplace 401(K), 403(B), or ROTH IRA. The tax savings will be worth even more as tax rates rise.
Building long term wealth requires attention to spending, saving, investing and tax planning. I understand that at times these issues can be overwhelming. The cost of avoiding thinking about taxes results in paying more to the government. Pay only the amount of taxes that are due, and take advantage of legal methods to reduce your tax burden.
Can’t Get Enough Tax Resources?
- Tax Changes Coming in 2013 at Joe Taxpayer
- Don’t Mess With Taxes by Kay Bell
- In the Face of Taxmageddon at Moneylicious
What are your tax planning tips and stories?
image credit; Fidelity.com