Minimize your Tax Liability

Have you ever had the “tax time jitters”?  That’s when you wait anxiously for the tax preparer to give you the good news or the bad news.  Help yourself by minimizing the taxes you could possibly owe at the start of the tax year.

A little knowledge goes a long way.  People who learn to assess their tax situation early can head off trouble with the IRS.  It all begins with you. Here are some tips to help you.

o Fill out your W-4 accurately

The W-4 is the tax form an employer gives you when you are hired.  The purpose of the form is to determine your tax exemptions.  Dependents are examples of exemptions.  You can, by law, claim the maximum amount of exemptions due to you.  Each person claims one for themselves and one for each dependent.  W-4 forms can be changed as many times as you need to during the year.  To get a better refund, some married people have taxes taken out at a single rate during the year.

o Itemize if you can

When filling your taxes you have two choices:  take the standard deduction or itemize.  Anyone who has enough deductions to subtract more money than the standard deduction should itemize.  However, itemization is not an easy process.  Read the stipulations for each category carefully to see if you meet the requirements.  You’d be surprised what you can deduct. Uniforms that you buy for work can be deducted.  Mileage for doctor visits for a relative you take care of is an itemized deduction as well as the co-pays for the medicine and the doctor visits.

o Use credits when possible

It is a fact that credits are better than deductions.  A deduction will reduce your taxable income.  A credit will reduce the amount of taxes you owe.  Here’s an example to show the difference:  You owe the government $5,000 on the $50,000 you made during the year.  Charitable contributions during the year net you a deduction of $2,000.  Now your taxable income is $48,000 so you owe the government $4,800.  Using the same example, you received a tax credit of $4,000.  That previous $5,000 tax bill is now $1,000.  Which would you prefer?

o Contribute to an employer’s retirement plan

Money that is placed in a retirement account is tax-deferred.  Taxes are paid on the money when it is withdrawn after retirement.  Before-tax deductions reduce the amount of your gross income that can be taxed.  Contribute as much as you can to reduce your tax bill.

Do you habitually owe the IRS at the end of the year?  Try these ideas to head off writing that tax check.  Taking a little time to plan your tax strategy can lead to a refund at the end of the year instead of a tax bill.