Reduce Your Taxes Through Mental Power!

reduce taxesIt’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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Image courtesy of Tax Credits at Flickr.

14 Responses to Reduce Your Taxes Through Mental Power!

  1. Untemplater March 2, 2014 at 11:29 pm #

    I try to learn at least one new thing about taxes each year. I study my returns like a hawk to make sure there are no errors, and to also try to understand what all the forms are for, and where my money is going. I need to get out of California – the state taxes here are outrageous!
    Untemplater recently posted…An Ice Tsunami Bulldozes Over Homes And Insurance Companies Won’t PayMy Profile

    • Mr. Utopia March 3, 2014 at 12:26 pm #

      Good for you, Sydney. I’m glad you scrutinize your returns – I know lots of people just blindly accept whatever their preparer or software spits out. And I hear you about California taxes – it’s craziness! I’m a fellow CA resident…the pastures sure look green over there in Texas ;-)

  2. DC @ Young Adult Money March 3, 2014 at 9:53 am #

    I don’t think about it just once a year, but I certainly don’t study up on it! I have spent quite a few hours getting our documents in line for tax season and we will be actually filling out forms the last weekend of March. I am pretty sure we will be paying in this year and I definitely want to be more prepared for next year. I plan on increasing our 401k contribution, increasing our quarterly estimated tax payments, and finally reconciling side hustle income once a month instead of just at the end of the year.
    DC @ Young Adult Money recently posted…5 Steps to Turning Your Skills into MoneyMy Profile

    • Mr. Utopia March 3, 2014 at 12:33 pm #

      Yeah, I didn’t mean to imply one needs to study up on taxes so much that they become the equivalent of someone with a degree in taxation! But, learning about the parts of the code that impact you or researching ways you can save money through taxes is just as important than trying to save money elsewhere. DC, your plans to “get on top” of your taxes are great steps to take and increasing the 401(k) contributions is a smart idea.

  3. Holly@ClubThrifty March 5, 2014 at 10:32 am #

    We just did our taxes last week and I’m happy to be getting a return. I say that because I paid in SO MUCH in estimated quarterly taxes that it makes me want to puke. I don’t mind getting a small return, so I’m fine with it. We are researching ways to possibly lower our tax liability in future years, although there aren’t a lot of options for me.
    Holly@ClubThrifty recently posted…Women’s Empowerment WednesdayMy Profile

    • Mr. Utopia March 5, 2014 at 5:38 pm #

      Estimated taxes – the “fun” part of being self-employed. That and the self-employment tax ;-) I’m sure there are some ways to lower your overall tax liability, Holly…there’s almost always something.

  4. Syed April 2, 2014 at 7:04 am #

    I’ve taken an interest in taxes this past year and it’s mainly because I did them on my own this time around. It really is an enlightening experience as you see how your own tax is calculated and you can plan ahead to try to pay the less taxes next year. The tax code is certainly complex, but I can’t think of anything more profitable to try to learn.
    Syed recently posted…The Infinite Monthly Payment LoopMy Profile

    • Mr. Utopia April 3, 2014 at 7:25 pm #

      Learning as much as you can about the tax code is definitely a worthwhile investment. And tax planning is big business – CPA’s and financial advisors can make a pretty penny helping clients to reduce taxes via prudent strategies and financial moves (especially high net worth/high earning clients).

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