It’s everyone’s favorite part of the year again. No, not Thanksgiving or Christmas – it’s tax time! Right now people are making sure they’ve got all the necessary documents and forms. Perhaps some of you filed early to get your anticipated refund as quickly as possible. Others are procrastinating and pushing back preparation of their returns because they simply don’t feel like dealing with it just yet. Or maybe they know they owe and want to hold onto their cash for as long as possible before forking it over to the government.
Yes, “tax season” is officially upon us in all its splendor. The time of the year when people get excited about how to spend a refund or curse aloud at how much the “tax man” is stealing. What an awesome – or awful – few months!
Tax Season is Not Real
Here’s the catch: the notion of a “tax season” is bogus. That’s right, it’s a contrived term used to describe the period of time leading up to the legal requirement to file your tax returns (or an extension). That date, as we all are well familiar with, is April 15. Why am I bothering to nitpick about the use of “tax season” then?
Because it is “tax season” all year round. You are doing yourself a mighty disservice if taxes only pop into your mind once a year. So many of the decisions you make (or don’t make!) throughout the year influence your tax liability. That’s why it is imperative to constantly think in tax terms.
How to Reduce Your Taxes using Mental Power
The key takeaway and lesson to be learned is this:
Be consciously thinking about how the decisions you make impact your tax bill. Take responsibility by evaluating different options available to you. Be proactive in finding ways to reduce your taxes. Make taxes a part of your regular thought process. Be your own “tax planner.” Doing so could save you thousands of dollars!
Some specific examples of how you can go about doing this include, but are not limited to:
- Study your returns – If you prepare and file your own returns, then you have a step up on those who don’t. That doesn’t mean those who don’t do their own taxes get to escape from the responsibility of knowing what’s in them! First, I’d encourage you to do your own returns. If you do choose to use a tax preparer, then take the copy of your return and review it. Decipher what’s going on. Trace the numbers back to the supporting documents. Learn how the calculations are done. The same goes if you use tax prep software. Don’t just plug and play. Make an effort to understand the final output. Who knows, you might even detect an error that could end up saving you money when corrected.
- Study in general – Take the onus to learn up on incomes taxes. Sure, parts of the tax code can be downright complex and confusing. Chances are most of that stuff doesn’t apply to your situation anyway. Search for items that are applicable to your life. For example, let’s say you recently welcomed a child to your family. Research what tax breaks you could receive as a result. You’ll get an additional exemption for that child. Will you be using daycare once both parents are back at work? If so you might discover a dependent care flexible spending account offered through your employer could mean extra tax savings. But, if you don’t proactively seek out these types of tax advantaged options, you’ll just be throwing away money unless you view the government as a charity
- Health Savings Account (HSA) – Almost all of us incur some medical costs in a given year. Even if you only have a couple dentist appointments and a few visits to the doctor, your co-payments could be tax free. In other words, if you enroll in this work benefit, pre-tax deductions will be made from your paycheck and put into a special account. Then, when incurring qualified medical related expenses, you use this account to pay for them. You won’t be taxed on these amounts. Think about it, if you know you’ll have $1,000 of medical expenses and you’re in the 25% federal tax bracket, you’d save $250 in taxes by using a health savings account. If you aren’t taking advantage of an HSA, then I encourage you to take a look into doing so.
- Relocation – Is moving to another state possibly on the horizon? Be sure to investigate what will happen to your state income tax liability if you are considering a relocation. By moving to state with lower rates or no income tax at all, then you could stand to save a considerable amount if you retain a similar income level after the move. The opposite holds true too so be sure to take that into account if moving to say California or New Jersey. A new job offer might not be worth if it the raise you’d get goes straight to the state coffers!
- 401(k) - Increasing your contributions to a 401(k) or similar pre-tax retirement account is a quick and easy way to reduce your taxes. Technically you would be deferring payment of those taxes until you make withdrawals in retirement, but it’s still an excellent way to pay less income taxes. Spend some time evaluating and determining how your retirement planning strategy alters your tax bills.
- Order online – Even though Amazon is now charging sales tax for residents in many states, ordering online still presents a way to save on taxes since many retailers still don’t collect them. And, ok, we’re talking about sales taxes here and not income taxes. It’s still a good example though of how always being conscious of taxes should have significant influence on your everyday decision making.
- Home purchase – If you are considering the purchase of a home then you’ll want to evaluate how your tax situation could change afterward. Most people are aware they are able to deduct the interest paid on their mortgage. You should still take the time and effort to analyze all the various scenarios that can play out (different mortgage sizes, rates, whether you are going from renting to owning or simply upgrading to a new house, etc.) and what it’ll mean to what you pay in taxes.
- Tax friendly investments – There are lots of different investment strategies and options available. There’s no need get get into specifics here, but know there are tax-advantaged investments such as treasuries or municipal bonds where you might not have to pay any taxes on the interest earned. Learn more about them if you’re interested in seeing if these tax advantaged investment options are right for you.
- Stay on top of current news – You never know when our “buddies” in Congress will pass new laws impacting what you pay in taxes. For instance, you could lose your mortgage interest deduction sometime in the (near) future. Proposed changes to the tax code almost always seem to be on the agenda. You shouldn’t necessarily get caught up in all the constant back and forth between political parties. However, pay attention and be aware of developments that gain momentum and that could become law. It’s better to know how they’ll effect your tax situation sooner rather than later so you can plan accordingly.
How do you approach “tax season”? Is it something you deal with once a year and then forget about until it comes around next time? Or do you pride yourself as being tax savvy and think about the impact of taxes all year around in all your financial decisions?
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