We all know about taxes - we have to pay them each year. What is not so commonly known, however, are that various techniques you can use to be able to reduce your taxes and keep them to a minimum. Here are 5 ways to do just that.
1. Learn All You Can about Taxes
If you are to get the best reductions in your personal taxes, then you will either have to hire someone who really knows the tax laws or learn about them yourself. Doing them yourself will enable you to save money on your income taxes. There really is not any other way.
Saving the most money may mean that you talk to a tax consultant about your taxes one year, and then have them show you how to save even more money next year. This will get you off to a good start, then, you can prepare your own after that. Don't forget that you can get help from the IRS if you need it, or go to their Web site.
2. Save Applicable Receipts and Keep Good Records
Your ability to get the lowest tax payment will be due to the fact that you keep all applicable receipts and other records. The more detailed the receipts are the better tax break you will enjoy. Keeping your financial information organized and up to date as the year moves along will enable you to file taxes faster and get the most tax deductions.
3. Follow Sound Tax Reduction Strategies
By having current and accurate records of your deductions, income, interest, etc., you can immediately understand what adjustments need to be made. For instance, if you see that you need to lower your Adjusted Gross Income (AGI) for the year, then you may have time to make several deposits into a tax-deferred 401(k), an IRA, or into a Health Savings Account (HSA). This will both lower your income, and allow taxes to be set aside on that income, too.
Another thing that you can do would be to adjust your finances in such a way so that there are more tax-deductible expenses. This can be done easily if you have some kind of business and are self-employed. There are many deductions possible for utilities and other costs used in your business - but only for that portion of use. This could also include vehicle costs, travel, insurance, computers, and much more.
4. Watch Out for Common Tax Errors
People often make a lot of mistakes on their Federal income taxes each year. This results in not getting all their deductible expenses. Mistakes can prove costly.
You need to be aware that you may need to enter amounts of debt forgiveness if you had a recent debt settlement with a credit company. Connie Prater writes that this would be true if the debt settlement was more than $700. In that case, you should have received a 1099 C, in which the forgiven amount would be treated as income and must be reported on your 1040.
One way to avoid mistakes is to use tax preparation software. This can either be purchased at a low price, or there is even some available for free online with some tax Web sites. Some of these companies will even electronically file your taxes for free, too. Software minimizes the mistakes and helps you get it right the first time. You simply have to be sure that all the numbers are put in the right place.
5. Pay Your Taxes on Time
One more way to save money is to be sure that you file on time. Filing late and having to make payments after April 15th will only result in tax penalties being added - something you do not need. Of course, the best way to avoid filing late is to keep your finances organized throughout the year, and then tax preparation should be easy - just fill in the numbers (said it again – hope you get the hint). It will make it even simpler if you keep records in such a way that you keep running totals - then plug them in, file - and have a good day. Income taxes, then, will not be a problem.