When it comes to doing our taxes, most of us would much rather be doing something else. Taxes tend to be tedious and a real test of our patience. With tax season drawing closer, being prepared can help you save a lot. So let’s look at a few tips that have the potential to lower your tax bill and even save you a few hundred dollars.
- Organize yourself: Prepare in advance for your taxes with a little organization. Keep all tax-related documents and bills aside in a dedicated area. A box or file folder could be perfect for holding all the materials you’ll need when preparing your return. Having all your tax paperwork in one place saves you time and effort. If you have a tax professional to assist you in preparing your returns, all the information needed is available and readily accessible.
- Report all your income correctly: Underreporting or omitting sources of income when preparing your taxes could cost you dearly. Be diligent and ensure that all income, including dividends from investments, is correctly reported to the Internal Revenue Service (IRS). If the information you provided does not match that gathered by the IRS, penalties could be high and possibly include time in prison. While those who are employed by companies file and pay taxes once a year, if you earn a high income, you are required to pay installments throughout the year. So be sure to have sufficient finances at hand to pay your tax bill on time.
- Keep updated with tax laws: Tax laws are continually being amended, and it is vital to understand and keep up with these changes. Being unaware of the latest developments could mean not knowing that certain deductions are no longer allowed or that contribution amounts to various accounts have changed. This could lead to misguided investments and losing out on potential savings.
- Use 401(k)s and IRAs to your advantage: Using tax-advantaged accounts like 401(k)s can help when it comes to saving money for your retirement. Understanding how these accounts function helps to plan ahead. IRAs and 401(k)s are generally either Roth or traditional. Roth accounts require you to contribute on an after-tax basis. These accounts maintain your taxable income while offering you a back-end tax break. While your tax bill doesn’t get smaller, it allows you to make tax-free withdrawals from the account after retirement. Traditional accounts, on the other hand, require contributions on a pre-tax basis. This lowers your taxable income for the year and offers an up-front tax break.
- Hire a professional: Understanding all the laws that govern taxes is a very complicated process and is best left to the professionals. If your financial life is complicated, you could benefit from hiring a professional to prepare your return. Consider recommendations from family and friends and interview a few tax consultants before selecting one. With in-depth knowledge of the laws and amendments, a competent tax professional could help guide you with better tax planning.
It’s always a good practice to consult your financial advisor before making any investments. A good understanding of the basics of taxes can help you shrink your tax bill and save your hard-earned money.