5 Great Tips for Cutting Your Taxes
Why pay more when there are legal ways to pay less?
Everyone loves tax season, right? Yeah, I didn’t think so. We’ve all heard that there are so many tricks for lowering your taxes without breaking any laws (no one likes a cheater!), but finding out what they are is like chasing shadows. Well we’ll shed some light.
Saving for a Rainy Day
Most companies offer 401(k) retirement plans that you can pay into now and collect on later. The more money you put into your 401(k) the lower your taxable income becomes. Any money you put in comes out of your income before it becomes taxable, so if you put $4,000 in, as far as the IRS is concerned, that’s $4,000 you didn’t earn that year.
You aren’t allowed to put in more than $17,500 per year, but if you do put in the maximum amount, you could lower your taxes by $5,500. You won’t be taxed on that money until you retire and most retirees are in a lower tax bracket anyway. It’s a great way to save money now and later!
If you’ve gotten the “you’re 50 and you’re over the hill” birthday card, you can smile at all the young’uns and knock another $5,500 off your income, which means you can subtract a total of $23,000 a year if you pay it into your 401(k).
Most employers are willing to match what you pay into your 401(k) or at least match a good part of it. Think about it, if you pay $5,000 into your 401(k), you might get $5,000 for free! That’s a really good deal, right? Save on your taxes AND get free money!
In Charity There Is No Excess
If you really like someone and want to make them smile a tax-free smile, you can give them $13,000 and neither you, nor your new best friend, will have to pay taxes on it. You can give that money to anyone you want, a family member, a friend or the guy who serves you coffee every morning.
If you’re older than 70.5 years of age, you can donate up to $100,000 per year to charity, no taxes needed. You don’t have to include that amount in your AGI (adjusted gross income), so it won’t mess with any deductions you want to claim.
Organized People Are Just Too Lazy to Look for Things
If that’s your motto, you could have trouble with your taxes. Staying organized is the most important part of your life as a taxpayer. If you keep really detailed, organized records, it could actually end up saving you money by lowering your liability.
If you have business expenses that you might be able to write off, like business trips, new computers for the office, or even pencils, hang on to the receipts. If you bought a house or refinanced the one you own, make sure you keep records of the points and interest. And did you know that interest on student loans is tax deductible?
The IRS makes money - an average of $400 - every year off of people who don’t keep their records straight. So don’t lose receipts in the couch or stuff them in a box. Buy some folders and a label maker… it’s fun for the whole family!
Municipal Bonds – Tax Exempt from the Government with Love
Local governments issue municipal bonds and you won’t owe the IRS a dime on the interest. If it was purchased in your state of residence, that state won’t tax you either. You won’t get rich on municipal bonds, or “munis”, as they are often called, but you can make a pretty decent yield at 1.5%. If you are going to invest in munis, try to get ones that have a high rating. AAA, AA, A and BBB bonds are really the only ones worth buying; the rest are garbage so be careful and do your homework before you buy municipal bonds.
If you don’t want to have the headache of figuring out which municipal bonds are safe, you might want to go to a fund manager and invest in a solid municipal bond fund. A fund manager will keep your money invested in the bonds with the best risk adjustment. Be careful though, you don’t want to pay more than 5% in commission and you want to make sure that your manager has been investing in the fund for at least five years. Before you invest, you should also do your homework and compare benchmarks and other funds to make sure that the fund you’re looking at is a good one.
An Error Doesn’t Become a Mistake Until You Refuse to Correct it
Everyone messes up on their taxes. At least that is what a recent study done in major metropolitan tax agencies says. Luckily you can fix mistakes you made up to three years ago, when you file your current return. You might have paid more then you should have - or you may be missing out on a refund you should have received!
All Good Things Come to an End
If you are organized and motivated and have done a little research, you can save a lot of money on your taxes. If you aren’t, then at least make sure you are paying as much as you can into your 401(k)… that’s the most important tip we can give you. Still, if you have the time and it doesn’t give you a migraine, look in to some of our ideas and it could save you quite a bit on your taxes this year.