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|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Tax Planning is a Year-Round Process
Tax planning is not just for high income earners, nor is it something that should be done one day a year, on April 14th and then forgotten for the next 364 days. All income earners can benefit from the many provisions in the Internal Revenue Code that allow for ways to minimize taxes, but it does require some organization, a little bit of knowledge of the code and a year round approach to planning.
Get Organized Now
The best place to begin your tax planning is when you file your current tax return. You will have spent hours gathering documents, receipts, cancelled checks, and tax forms to compile your return. Why not take a couple of extra hours and organize everything into folders and accordion files so that, over the next year, you can simply add and organize tax related documents and receipts as you receive them. Your accordion file, with tabs for business expenses, charitable contributions, child care expenses, receipts, education expenses, medical expenses, etc. should be accessible for easy filing.
Adjust Your Withholding
Next, after marveling at the big refund you managed to generate on your 2016 tax return, check your W-4 form with your employer to see how you can start paying yourself more each paycheck. Why let the government keep your money all year, interest free, when you can have it right now? With each change in income, or additional deductible expense, you should review your W-4 exemptions to ensure the IRS is withholding the bare minimum. Refunds may seem like a good thing but they are usually a result of bad planning.
Not all Income is Taxed the Same
Knowing how your income is taxed can go a long way to minimizing your tax bite. Most people look at the bottom line of their tax bill and assume that all of their income is taxed at the same rate. But, it’s not. The first dollar you earn in the year is taxed at the lowest tax rate of 10% while the last dollar you earn is taxed at a higher rate (as high as 39.6% depending on your total earnings). This becomes important when you are anticipating a jump in earnings that can push you into a higher bracket throughout the year. For instance, if you are a single filer, an increase of $1 on an adjustable gross income (AGI) of $91,150 would move you from the 25% bracket into the 28% bracket. There are some moves you can make to keep AGI low, such as deferring a salary increase or bonus into the next year, or increasing your 401(k) contribution at the time of your salary increase, accelerating expenses such as mortgage payments into the current year or making a larger contribution to a charity.
Your Biggest Tax Planning Tip
With the advent of online banking you can more easily compile all of your financial information and generate instant tax returns in a fraction of the time. Most banks offer online banking that allows you to upload your information to financial management software like Quicken. There it is easily sorted into customized income and spending categories. Once there, it can then be uploaded into an online tax preparation programs such as Turbo Tax.
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