(MP) Most people start their tax planning around April 15 – when their tax return for the previous year is due. Those serious about money management are always looking to cut the tax bill know April 15 is way too late. Why? Because what’s done is done. If you want to pay less in taxes and if you want the IRS to pay you back with hefty refunds year-after-year, plan for it long before the current tax year ends.
Most taxpayers – even the rich – don’t have a single blockbuster loophole that cuts their taxes down. Getting money back from the IRS is simply a matter of taking advantage of every tax-saving opportunity open to you. Remember, in today’s economic climate – you can’t afford to be a passive taxpayer. Actively planning to save as much money as possible by keeping on top of your money management skills is the way to go. Our personal finance blog will show you…
How to Cut Your IRS Tax Bill to the Bone
Get your scissors and start with these tax cutting savings tips below:
- Shelter investment gains: Put high-return investments such as growth stocks, into tax-sheltered retirement accounts, and income-producing investments such as bonds into taxable accounts. You’ll pay taxes on the income now, but sheltering growth from taxes will save more in the long run. If your tax bracket is 31% or more, buy municipal bonds. Interest on such bonds is tax-free.
- Have a business? Hire your teen: The young adult will pay little or no taxes on the salary you pay them. You can deduct his or her salary at the tax rate the business pays.
- Borrow to gain deductions: Money spent on big medical bills can be deducted from your taxes. So can contributions to charity. If you want to gain those deductions, but are low on cash, pay with your credit card. The same goes for spending for deductible business expenses. For a really big expense, borrow the equity in your home so interest on the loan will be deductible.
- Borrow against investments: If you need money, selling investments will hit you with a capital gains tax. Avoid the tax by keeping the investments and using them as collateral for loans.
- About expenses: It’s a great idea to start practicing to pay IRS bill sooner than later. Pay next’s year’s estimated state and local taxes before the end of this year, so deductions come on this year’s return. Use this method for charitable contributions, business expenses, etc. Then worry now about cutting this year’s tax bill. Worry about next year’s bill – next year.
- Withholding: Under-withholding can bring penalties from the IRS. Check yearly with your tax preparer and your payroll department to make sure you’re withholding the amount you should.
- Buy tax-efficient mutual funds: You want funds that hold investments for the long term, instead of frequent buying and selling. The slower the fund is to turn over its portfolio, the fewer taxable capital gains you’ll get hit with.
- Contribute all you can to retirement plans: It should go without saying that everyone should contribute the allowable maximum to all retirement plans since they provide an immediate deduction. However, the majority of taxpayers don’t max out retirement contributions, which hurts your yearly tax bill in the long-term.