It’s tax season, yall. Do you know what that mean? It means I want to cry.
Being self employed is one of the best things that I’ve ever done, but on the flip side I hate having to pay a tremendous amount of taxes which should be each quarter, but I always forget and end up paying one lump sum in April plus fees for not paying quarterly. My first year filing as self employed, I wasn’t prepared. I had never done it before so I didn’t save any receipts, keep any notes about my travel expenses, keep a mile log or had frankly done anything.
As the years go one, I’ve learned to hoard all the paperwork. Odds are you won’t be audited, but if you do you want to be prepared. Being prepared will only help you in the long run. Not only will you have it as a back up if you do get audited, but it will also help you save money while preparing your taxes.
There is nothing unpatriotic about taking advantage of legal measures to reduce your tax bill, says Jeff Gorton, a veteran Certified Public Accountant and Certified Financial Planner™, and head of Gorton Financial Group. Most Americans, however, don’t understand the basics of how to minimize the tax burden, he says.
Here are three tips for keeping more of your money:
• Credits: Tax credits are usually subtracted dollar for dollar from the actual tax liability and may be utilized when filing for 2013. They include the Child Tax Credit, which allows up to $1,000 for children younger than 17; the American Opportunity Credit, featuring up to $2,500 in tax savings per eligible student for tuition costs for four years of post-high-school education; and the Energy-Efficient Home Improvement Tax Credit, which grants qualifying taxpayers 10 percent of the cost of certain energy-efficient building materials — up to a $500 lifetime credit. The Child and Dependent Care Credit, for those who have to pay someone to care for a child younger than 13, or another dependent, offers up to $3,000 for one qualifying individual, or up to $6,000 for two or more qualifying individuals.
• Deductions: Like tax credits, deductions have phase-out limits, so you may want to consult with a professional. Deductions are subtracted from your income before your taxes are calculated, which may reduce the amount of money on which you are taxed and, by extension, your eventual tax liability. Some examples include contributions made to qualifying charitable organizations. And, you may be able to write off out-of-pocket costs incurred while doing work for a charity. Others may include amounts set aside for retirement through a qualified retirement plan, such as an Individual Retirement Account; medical expenses exceeding 10 percent of your adjusted gross income are now deductible – expenses exceeding 7.5 percent are still deductible for those older than age 65; and, potentially, mortgage interest paid on a loan secured for your primary residence.
• Tax-favored investing: This involves both tax-exempt investments and tax-deferred investments. Tax-exempt investments, which include such vehicles as municipal bonds and certain money market funds, offer a way to grow your money that’s exempt from federal taxes. Municipal bonds are free of federal income tax and may be free of state and local income taxes for investors who live in the area where the bond was issued. Tax-deferred investments, on which taxes are postponed until you withdraw your money, include qualified retirement plans, such as traditional IRAs and employer-sponsored plans, as well as insurance products such as annuities and, sometimes, life insurance.
Do you use these tactics to help you get the most out of taxes each year? I’m dreading even looking at my taxes.
(Disclosure: If you have any questions about your taxes, please consult your CPA. This info was provided by Jeff Gorton.)