Just when you thought your plate wasn’t full enough, tax season is around the corner and prep time is needed. Earning statements, dividends, last year’s return, and on and on. It’s time to begin rounding it all up.
Then, the decision needs to be made whether to complete your taxes on your own or hire a professional. This can be tricky because the rule book is constantly changing. The goal is to maximize your tax savings and trim your total bill. Are you qualified to do that?
Reducing Your Tax Liability
Simply put, you have a tax liability. You earn money, you pay taxes. You can chose to either withhold taxes from your paycheck automatically or file quarterly estimates. Then tax time comes (April 17th this year) and you calculate what you owe and you either pay more – because your estimates weren’t enough. Or you paid too much and you get a refund.
More Money, Higher Tax Rate
The amount you owe in taxes (federal, state and/or local) is determined by how much you’ve earned each year. But not all income is created equal. And certain types of income are very different as far as tax code is concerned.
For instance, municipal bonds are tax free in comparison to short-term capital gains where you pay income tax (but not FICA). Also, earned income – your wage – where you pay income tax and part of the FICA vs. self-employment which is heavily taxed because you pay both sides of FICA and of course income tax.
You can cut your tax bill in several ways. The government allows you to deduct certain items from your gross income – the amount you owe before taxes – shrinking the pool of money you are taxed on.
Considering all this, you definitely want to raise your awareness and pay as little as you have to.
Your Adjusted Gross Income (AGI) is a key element in determining your tax liability. This is your income from all sources minus any adjustments to your income. The number one way to reduce your tax bill is to reduce your income. A full list of adjustments is found on Form 1040, page 1, lines 23 through 34.
Tax Deductions and Tax Credits
Tax credits lower your bill dollar for dollar. A tax deduction shaves money off your taxable income; the value depends on your tax bracket. To learn the rules around this when choosing to take a credit or deduction you can visit the IRS website.
Work Towards Favorable Incomes
Becoming knowledgeable and learning the ins and outs of how to file your taxes is well worth the education. In the same vein, hiring a tax professional could result in a large reduction to your tax bill. Don’t assume just because you hire a “professional” they are committed to reducing your tax liability. Start with recommendations from friends, co-workers and associates. And, expect to pay several hundred dollars for the service, which definitely will be worth it if you find a good one that is really working for you.
Preparing your own taxes is time-consuming, stressful and confusing if you don’t know exactly what you’re doing. Take some time to consider your options. And remember, your taxes are your single largest expense!
A person doesn't know how much he has to be thankful for until he has to pay taxes on it. ~Author Unknown