Do you think you are paying too much on income taxes? Are you getting all the credits and deductions you are entitled to? Keep reading to learn the 7 tips to help you minimize taxes and keep more in your pocket.
You should also participate in company retirement plans. Every dollar you contribute will reduce your taxable income and thus your income taxes. Enrolling in your company’s flexible spending account is another thing you should do. You can set aside money for medical expenses and day care expenses. This money is “use it or lose it” so make sure you estimate well!
Make sure you pay in enough taxes to avoid penalties. Interest and penalties is what Uncle Sam charges if you don’t pay in at least 90% of your current year taxes or 100% of last year’s tax liability.
Buy a house. The mortgage interest and real estate taxes are not only deductible, they may also allow you to itemize other deductions such as property taxes and charitable donations.
Keep your house for at least two years. One of the best tax breaks available today is the home sale exclusion, which allows you to exclude up to $250,000 ($500,000 for joint filers) of profit on the sale of your home from your income. You must, however, have owned and lived in your home for at least two years to qualify for the exclusion.
Time your investment sales. Sell some of your losers to reduce taxable income if your income is higher than expected. If you will be selling a mutual fund, sell before the year-end distributions to avoid taxes on the upcoming dividend or capital gain. Also, you should allocate tax efficient investments to your taxable accounts and non-efficient investments to your retirement accounts, to reduce the tax you pay on interest, dividends and capital gains.
Carefully plan your retirement plan distributions if you are retired. You should consider taking money out of taxable investments to keep you in the lower tax bracket if a retirement plan distribution will push you into a higher tax bracket. Also, pay attention to the 59-½ age limit. Withdrawals taken before this age can result in penalties in addition to income taxes.
You should bunch your expenses. Certain expenses must exceed a minimum before you can deduct them (medical expenses must exceed 7.5% of your adjusted gross income and miscellaneous expenses such as tax preparation fees must exceed 2% of your AGI). If you want to deduct these expenses, then what you may need to do is bunch these types of expenses into a single year to get above the minimum. In order for you to achieve this, then you might prepay medical and miscellaneous expenses on December 31 to get above the minimum amount.
Here, the most important thing is to be aware of the tax deductions and credits that apply to you and to plan for taxable events. And don’t be afraid to ask for help. Far outweighing the cost to hire that professional are the benefits from consulting an experienced tax professional.
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