How to Lower Your Taxes

Financially successful people often pay high income taxes. Reducing taxes can go hand in hand with making wise life decisions.

Instructions

Difficulty: Moderate

Things You’ll Need:

• Calculators
• File Cabinets
• Pencils
• Calendars
• File Folders
• Notebooks
• Tax Preparation Software

Develop a Fresh Perspective

1. Study tax law each year. Read IRS publications, particularly the 1040 instruction booklet, and articles about new tax laws.
2. Have your tax return prepared by an expert every three years or so if you normally do your taxes yourself.
3. If you have your taxes prepared for you, either see a different, experienced tax preparer every few years or make a list of questions to ask during the off-season and while being interviewed.
4. Keep and organize receipts and documents for investments, property, business and employee expenses, mileage, donations, medical bills, and casualties and other losses.

Buy and Put Away

5. Purchase a home.
6. Purchase rental property.
7. Put the maximum amount allowed into a retirement account.
8. Put up to $2,000 each year into a traditional IRA if you are not covered by another retirement account at work or if your income is below the IRS limit.
9. Put up to $2,000 each year into a spousal IRA if your spouse is not working or is not covered by a retirement plan at work.

Plan Ahead

10. Be aware of deadlines for making retirement contributions at work and for opening up retirement accounts for the self-employed.
11. You have until April 15, the deadline for filing the past year's tax return, to make an IRA contribution.
12. Estimate and plan any medical, dental and eye care costs and payments for the upcoming year if your employer offers a medical benefit.
13. Estimate for the upcoming year and pay during the tax year for child and dependent care if your employer offers this benefit.
14. Resist cashing in retirement accounts when you change jobs or need extra money.
15. Have taxes withheld or make estimated payments if you receive gains from sales, prize winnings, bonuses, spousal support, unemployment compensation or other significant amounts of income.
16. Track purchases, reinvestment of dividends and sales of stocks.
17. Keep records of property and investment purchases, sales and improvements.

Tips & Warnings

• Amend tax returns if you have not taken advantage of a deduction or credit. You have three years from the due date of the return to do so.
• You may be able to itemize deductions when your state withholding tax or estimated payments approach the federal standard deduction. Keep records just in case you can.
• You can deduct property taxes and most mortgage interest if you live in a home you are buying. Doing so usually allows you to itemize deductions, including high medical costs, motor vehicle taxes, state income taxes, charitable contributions, high casualty losses, and high employee and investment expenses.
• You can deduct almost all expenses you pay related to property you rent out. You must also depreciate your investment in the property, furnishings and improvements, often giving you a loss that you can subtract from your other income.
• Taxable earned income of employees and the self-employed is reduced by allowable retirement contributions and reduces income taxes.
• Allowable contributions to traditional IRAs reduce taxable income directly.
• Roth IRA contributions do not have an immediate effect on income taxes, but could lower future taxes considerably, particularly for younger investors.
• You won't miss the money put into a retirement account after one or two months. You will experience even more satisfaction if your employer matches any of your contributions.
• Employers using these plans will deduct equal amounts from each paycheck to cover the amount you estimate you will spend on medical care and dependent care. Your taxable earned income will be reduced by the amounts allocated, reducing your income tax.
• Move your residence and/or work location to a state that does not impose a state income tax, if you can - Alaska, Nevada, Washington, Florida or Texas.
• Move your residence and/or work location to a state that has a lower income tax rate, if possible.
• Moving investments (other than those in a retirement account) from one fund to another fund, even within the same firm, is a taxable event.
• The 20 percent mandatory withholding from the early distribution of a retirement fund usually will not cover the tax and penalties on the withdrawal.
• Gifts and inheritances are not taxable income for the recipient. The gift giver and the estate pay any taxes owed.