Great Savings Tip #96 – Cut Your Taxes

 

 

10 ideas for legally cutting taxes.

 

This Great Savings Tip is designed to help find ways to spend less and save more. For more ways to save money see our Great Savings Tips page with a complete list of all our tips.


Tip #96) Cut Your Taxes. Some people seem to think it is okay to pay taxes late, to under-report income, to over-estimate deductions or to skip filing altogether. If you want to risk sleepless nights, fines, imprisonment, or the confiscation of your property you can try to skirt the rules. We don’t recommend it! Instead, take the time to learn about taxes to be sure you’re getting every deduction you’re legally entitled to. The best part of doing it legal is once you file your return you won’t have to look back and wish you’d done things differently.

 

So how do you legally money save on taxes?  Here are 10 ideas worth consideration:

 

April 15th is the tax deadline.

Are you ready?

(1) Plan ahead. Planning ahead can save a lot of money, not to mention aggravation when it comes to taxes.  Be sure to keep all significant receipts, bank records and important documents in one place.  That will make them easy to find when you need them.  You may also want to: 1) Make qualifying charitable donations before the end of the tax year. 2) Watch for changes in depreciation and investment rules to take advantage of potential home business deductions. 3) Avoid selling certain assets to prevent short-term gains. 4) Sell certain stocks or other investments either before or after the new tax year begins to “realize” a gain or loss in a particular year.  Properly timing deductions, losses and gains can save big on your tax bill.

 

(2) Use tax software. These days tax software is cheap—even free if your taxes are straightforward.  The IRS and the companies who make software now make it super easy to file online.  Depending on your situation and how comfortable you are with computers, you can either buy software you can download to your computer or enter your tax information over the internet.  A huge advantage to using software is all the built in help you get—you’re much less likely to miss important deductions or forget to file critical forms.  One caution: Make sure you’re dealing with a well-known and reliable company that uses a secure connection before sending your personal information online.  Want to file online for free?  If your income is less than $58,000 you can use the IRS “freefile” method. For more info on freefile see this link.  If you prefer to use commercial software check out these links:  Tax ActTurbo Tax, or H&R Block.

 

Taxes can get complicated pretty quick.

Are you confused? Get help.

(3) Use a Certified Financial Accountant. If your situation is fairly straightforward you can easily manage your own taxes or go to get help from a walk up service like H&R block.  However, anyone with complicated investments, large losses, multiple sources of income, and anyone who owns a small business might do better getting the help of a pro.  A good pro can potentially save thousands in missed deductions, and steer you away from costly mistakes down the road.  If you’re in doubt about certain tax issues or are running into some complicated forms or deductions it’s probably worth paying a CPA for assistance.  CPA’s aren’t all the same.  Seek out an experienced CPA with a tax background if possible.

 

Keep more of your hard earned dollars.

Plan ahead to save.

(4) Sign up for free tax newsletters or alerts. Many companies in the business of selling software or of preparing returns (i.e. accounting firms) will send out free newsletters to keep their customers informed of important tax changes.  They also post information on their websites.  As an example, see “Tax Calculators and Tips From Turbotax“.  Also, the IRS lists all the latest tax scams on their website here and they list lots of tips on taxes here. Tips and alerts end up saving money because they help avoid costly pitfalls.

 

 

(5) Fund a retirement account. If you qualify based on income and if you fund your IRA before April 15th you can still apply the deduction to the previous tax year.  In other words, if you open or add to an IRA in March 2015, you can still deduct the amount from your 2014 income and thereby cut your 2014 taxes.  Certain restrictions apply.  Also, funding your 401K can reduce pre-tax income.  For more information on IRA’s see the IRS publications for Individual Retirement Accounts: IRS 590A.  Or for more information on 401K’s see our Great Savings Tip #76: Invest in a 401K.

 

(6) Learn more about taking deductions. Should you take a standard or itemized deduction?  If you own a home and are paying interest on a mortgage, have large medical bills or losses, or have made donations it may pay you to itemize your deductions.  See the IRS publication 501 for more information. Warning: You can’t itemize deductions on a 1040 EZ.  If you’re using software, the good news is you will only need to answer a few questions to figure out which choice is better for you and to use the proper forms.

 

It's good to know your tax deadlines.

Don’t guess. Find out when to file.

(7) Know the deadlines for filing. File your taxes late, or fail to file enough estimated taxes by the due date and you could end up owing penalties.  Filing an extension is easy so if you are running behind on your return don’t wait to get the form.  Be aware, though, that even with an extension you’re required to pay any taxes due by April 15th.  For more information on when, where and how to file see this article from the IRS.

 

(8) Donate to eligible charities. You can deduct donations for eligible charities.  Most eligible charities are listed in IRS Publication 70.  For a searchable database of the charities in Publication 70 go the IRS website here.  Be sure you keep receipts for donations.  In some cases, you can make your own receipt if an organization fails to give you one.  For specific rules on receipts and other information on charitable donations see IRS publication 526.

 

(9) Check your math to avoid penalties.If you’re using software you’ll typically find math checking is done for you.  Just be sure to run an extra check prior to filing.  Otherwise, if you still prefer to do your taxes by hand, be sure to run your figures a couple times to be sure your math is correct.  If your math is incorrect be aware the IRS may change your return for you and it could mean you’ll pay more taxes plus penalties if there has been an underpayment.

 

(10) Minimize short-term capital gains. Most property or investments you own are subject to gains and losses.  Long and short-term capital gains rules can seem confusing.  However, short term gains are typically taxed at a higher rate (i.e. gains from assets you hold less than a year get taxed at ordinary income rates).  Long term gains get taxed at a special rate (0 – 15% depending on your tax bracket).  To get the latest skinny on capital gains and losses be sure you (a) get help through your tax software, (b) check in with your accountant, or (c) read this MyFederalRetirement.com. For more information, see the IRS publication 550 Investment Income and Expenses.

 

 

Got Any Tax Horror Stories?

 

Did the dog eat your tax return?  Has the IRS confiscated your property?  Have you just learned Aunt May has fallen victim to an internet tax scam?  If you or someone you know has run into a problem with taxes we’d love to hear what happened.  Why not share with our readers in the comments below?

 

Stay Tuned

 

For a complete list of all our savings tips click here.

 

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