I was helping my 22-year-old daughter do her taxes last month. (Yes, she chose to wait till the LAST MINUTE!) halfway through, she lets me know how much she hates doing taxes like there is another option. OK, she could have paid someone to them for her but come on. Three W-2s, two states, no deduction or Schedule C, nothing complex. ONLY three W-2s. She used a common tax prep site and had them done FOR FREE!!!!! Doing taxes sucks. No one, not even accountants, likes to do taxes. But if they are a fact of life.
So how do you manage your taxes and the amount you need to pay to maximize your income? I just gave you the first one. If your taxes are simple or your income is low, DO IT YOURSELF using a tax prep website. Easy Peasy. This doesn’t take a rocket scientist (or accountant) to figure out.
BUT…, many of us have some complexities. These may be investment dividends, real estate, charitable donations, or multiple types of income (W-2, 1099, self-employment, etc.). In these cases, consider paying for tax prep. Tax attorneys or CPAs are up to date on the most recent laws and can minimize the amount you owe the IRS.
Forbes offers six tax planning strategies to minimize your tax burden (Check out the article HERE).
Maximize the tax advantages of your retirement accounts
This may be your employer’s retirement plan which could match the dollars you put into the plan. This is usually up to a certain percentage of your pay. You can also maximize the amount you can contribute to a ROTH IRA. As of this post, these grow tax-free, and you can take the money out tax-free when you retire.
Capitalize on depreciation
Certain properties can be depreciated and used as an income tax deduction. Said another way, you can take a loss of value for certain properties on your taxes. Unless you are savvy, you should probably let a tax professional help with this.
If you are self-employed you can maximize your tax deductions
You can deduct most anything spent on a business from your taxes. This can include office supplies, subscriptions, education costs required for maintaining your business, and many more. A simple web search will get you on the right track but again, consult a tax professional for help specific to your business costs.
Donate to charity
Forbes suggests donating appreciated stock (which has grown in value) to charity, but this can be any donation to any qualifying charity. Be aware that only a percentage of your donation is tax-deductible, and the amount may need to be over a certain percentage of your income. Check with your tax professional.
Self-employed health insurance costs can be tax deductible
There are certain criteria that may need to be met to deduct this cost, so the entrepreneur may want to consider top-of-the-line coverage to minimize their tax burden. This may lead to a lower total out-of-pocket cost. But you need to do the math.
Using life insurance
Some life insurance policies offer a savings/investment option. While the author of this Forbes article recommends this, I do not. Use life insurance for life insurance. Use investment accounts for investments. Blending them usually offers a much lower rate of return. I’ll cover this in more detail in future posts.