The sun rises on a new financial year – the perfect time to jumpstart your savings plans!
Tax season is upon us and can be overwhelming, but with the right strategies in place, you’ll have an easier time paying taxes, and you can maximize your savings through strategic tax planning.
Investing a bit of effort and research can help you plan your finances to minimize your tax burden and increase your savings. Knowing the ins and outs of filing taxes will help you save money. Keep on reading to give your savings a serious boost this year!
Understand the Tax Laws
Start by becoming familiar with the applicable tax rates and deductions. Different tax laws apply to different situations, and it is your responsibility to ensure you take full advantage of the tax breaks available.
Keep up with the most recent tax laws, rules, and regulations. Changes to tax laws can affect how you plan your taxes. Visit the website of the Internal Revenue Service (IRS) or talk to a tax expert to find out how the current tax rules may affect your finances.
Once you understand the tax law, you can better plan when to file your return, where to invest your money, and how to structure your business. Creating a plan can help you save money in the long run.
Contribute to Retirement Accounts
Contribution to retirement accounts should be a priority for those who hope to maximize their savings. By contributing to retirement accounts, such as 401(k)s, IRAs, and Roth IRAs, you can reduce your taxes and increase savings.
Not all types of retirement accounts work the same. Understanding the benefits of each can be essential to strategically planning for taxes and savings.
Furthermore, contributions to a retirement account reduce your taxes and accumulate over time. They can be withdrawn without penalty or taxes when you reach retirement age.
Lastly, getting deductions for your contribution may be possible when filing taxes. These combined elements may help you maximize your savings and lower your taxable income.
Optimize Health Savings Accounts
The primary way to optimize a health savings account is to make sure contributions are made each year and that the contributions are made before the end of the tax year. This allows you to make pre-tax contributions which reduce your taxable income and allows you to save for health care expenses.
Additionally, be aware of tax code changes that may provide additional tax savings, such as deductible HSA contributions. You should also be mindful of your account balance and ensure you only use funds for qualified medical expenses.
Ensure you are not incurring additional taxes for investing the funds without actually spending them. Finally, update your contributions every year to ensure you are where the maximum savings amount for that year is.
Take Advantage of Tax Deductions
By taking advantage of deductions, you can lower your taxes and put the money you save aside for other expenses. Common deductions include:
- mortgage interest
- state and local taxes
- medical expenses
- charitable contributions
- educational expenses
- investment expenses
Keeping records of your deductions can help you take advantage of any eligible tax deductions you may otherwise miss. Tax deductions can also vary from year to year, so staying current on any changes that might affect your deductions is crucial.
Utilize Tax Credits
Tax credits directly reduce your tax liability, providing a dollar-for-dollar reduction. Depending on your financial situation, you can take advantage of tax credits such as:
- earned income tax credit (EITC)
- child tax credit
- retirement savers’ tax credit
- alternative minimum tax credit (AMT)
- education-related credits
Additionally, there are state-level tax credits, such as the state-level energy efficiency tax credit and low-income housing tax credit. Reviewing the different requirements for each credit to ensure you maximize your savings is essential.
These credits can significantly reduce the amount of tax you owe.
Plan for Capital Gains and Losses
You need to carefully plan for when you may have realized capital gains or losses in the past. Plan for when you anticipate capital gains or losses in the future.
Developing a tax strategy can help determine when to keep or sell stocks for capital gains or losses. Consider selling investments that have decreased in value to offset capital gains and potentially reduce your taxable income.
Long-term capital gains are generally taxed at lower rates than short-term gains. Knowing when to sell and what amount can help minimize your tax burden.
Timing of Income and Expenses
Timing your income and expenses offers an excellent opportunity to improve your tax obligations. A key ingredient to success here is ensuring your income is taxed at the lowest possible rate.
You can do this by ensuring your income spreads over the entire financial year. Income tax deductions and credits must be fully utilized within each financial year.
Make the most of tax planning opportunities by deferring income and pre-paying expenses up to 12 months ahead. You can also dispose of investments well before the end of the financial year. Be aware of tax brackets and thresholds that may impact your tax liability.
Work With a Tax Professional
Working with a tax professional gives you the advice to find the right strategies for your financial situation. They can provide an unbiased opinion on important decisions that can help you save money.
Tax professionals know the tax code and can help you take advantage of all the credits, deductions, and exemptions you may qualify for. With their expert advice, they can assist you with retirement strategies, investment decisions, and more.
They can also advise you when to claim certain credits, deductions, and exemptions that maximize your refunds or reduce your tax liability.
You can also visit https://www.wealthability.com/blog/how-to-choose-a-tax-advisor/ to learn how to choose the right tax advisor for your case.
Save Money Through Strategic Tax Planning Starting Today
Strategic tax planning is a powerful way to maximize your savings and potentially save thousands of dollars each year. Proper tax planning is a multi-step process that should be undertaken every year.
Consider seeking expert help from a tax advisor to maximize your tax savings. Utilize the tools and strategies discussed to help you make informed decisions and begin maximizing your savings today!
For more tips and insights, check out our other articles.