TAX HELP; Tips to Lower Your Tax Bill

By in Saving

“In this world, nothing is certain but death and taxes.” Benjamin Franklin

The only way to avoid taxes is to be dead or not to earn any money. Which alternative would you choose? As Franklin succinctly implied, there is no positive manner to get away from the tax man!

Let me continue by saying, even as a personal finance writer, taxes don’t excite me. That said, there are some reasons why you need to focus on them.

MAIN TOPIC: The Benefit of Knowing About Taxes

How much time do you spend researching a new washer and dryer before you buy one? Or what about a new computer? If you’re like most people, you spend a considerable amount of time reading reviews and checking prices on line before you make a major purchase.

Now, how much time do you spend trying to understand and reduce your taxes? Probably not too much. Yet, taxes are one of the biggest expenses incurred, and you don’t just pay them once per year, but every year during most of your life. Ask yourself if it’s worth a few moments to familiarize yourself with the federal, state, and local tax codes in order to save thousands of dollars over your lifetime.

Fortunately, my parents were very savvy business people and serial entrepreneurs. I remember the times my dad would sit me down and talk to me about capital gains, business expenses, and ways to cut the tax bill. I learned so many legal ways to minimze taxes, that I’m sure our family has benefitted substantially. And, it has become a habit to think about legal ways to reduce our family tax bill.

Let me be clear, I AM NOT AN ACCOUNTANT AND ANY SUGGESTIONS IN THIS ARTICLE MIGHT NOT BE APPROPRIATE FOR YOU! That said, I’d like to share an incomplete and somewhat random list of helpful tax saving information. I invite any accountants out there to chime in with additional recommendations.

PRACTICAL APPLICATION; Pay Less Taxes by Having Less Taxable Income

The lower your TAXABLE income, the lower your taxes. None of us pay tax on every penny we earn. The key is to earn a lot, and get enough deductions and exemptions to make your tax bill smaller.

According to Jeff Schnepper of MSN Money, you get certain deductions whether you itemize your taxes or take the standard deduction. These deductions are worth examining; IRA and certain pension deductions, student loan interest, moving expenses, alimony, medical savings account deductions, self-employed health insurance premiums, and one-half self-employment taxes paid.

Contribute as much as you possibly can to an IRA and/or workplace retirement account. The dual benefit means you’ll have more money in retirement and pay less taxes.

Decide whether to itemize or take the standard deduction by calculating which approach will allow you to pay less tax. If you itemize your taxes, there are many more items which may be deducted such as mortgage interest, charitable contributions, real estate and other taxes, and business losses. If you have a small business where you make some income (like a blog), you have a wealth of expenses related to your business which may be deducted. If you qualify for itemizing, do a quick check and prepare your taxes with the standard deduction and again with itemizing to determine which method results in a lower tax bill.

Credits are the best, because a tax credit is a dollar-for-dollar decrease in your taxes. Some of you will qualify for the child tax credit or the child and dependent care credits. There are also some education credits available for the student(s) in the family.

For those parents out there, aside from the pure joy of parenthood, you get up to $3,650 deducted from your income for each qualified dependent. Don’t forget to take it!

The tax brackets change every year, and it’s really important to understand how they work as well as your marginal tax rate. You pay differing amounts of taxes as your income increases. Your marginal rate is the amount of tax you pay on the last dollar you earn. Knowing the 2011 marginal tax rates will help you to understand how much of that fat raise will go to you and how much to Uncle Sam.

HELP

  • There are many free and low cost tax preparation services available. If you fall under certain guidelines, the IRS (usually through the United Way) offers free tax preparation by trained VITA volunteers. I trained and provided this service last year and helped out a lot of folks as well as learned quite a bit about the tax code! Check with your local IRS office for more information.
  • AARP also offers tax prep for older citizens.
  • Even the IRS and state tax offices may help with your return; but be prepared to wait.
  • HR Block and the IRS dot gov web sites, have a wealth of tools to help with your tax questions.
  • MSN Money has loads easy-to-read tax articles.

For your own wealth, give your taxes a little extra time and you will reap tremendous benefits.

ACTION STEPS:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

  • Commit a few minutes each week to increase your tax knowledge.
  • If you have a side business, keep track of your expenses and include them on your taxes.
  • Give to your favorite charity and make a quick trip to Goodwill or the Salvation Army for a charitable contribution deduction before the end of the year.
  • Even if you don’t prepare your own taxes, consider using a free on-line tax preparation service or buying some tax preparation software to learn how you might lower your tax bill.
  • Don’t forget to learn about special tax benefits like the 2011 energy tax credit.

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image credit: JD Hancock

What are your tips for LOWERING THE TAX BILL?