Introduction to Tax Strategies

Tax laws are constantly changing and evolving. Therefore, lowering your tax bill involves careful planning and a solid tax strategy. In fact, there is hardly an aspect of your financial situation ? savings, investments, retirement funding, education, real estate, and estate planning ? that isn’t influenced by changing tax law. In recent years, historic tax reform has provided significant savings for individuals, families, investors, and businesses. However, many of these opportunities are temporary.

Planning your tax strategy is especially important if your circumstances have changed during the past year. As you being preparing your income taxes, take a look at the front of IRS Tax Form 1040, and think about the life changes you have experienced this year.

• Have you married or divorced in the past year? Near the top of Tax Form 1040 you must declare your filing status ? single, married filing jointly, married filing separately, head of household, or qualifying widow(er) ? which determines your marginal tax rate (the rate at which your last dollar of income is taxed).
• Have you had a child, adopted a child, or assumed caregiving responsibilities? If so, you may need to change the number of exemptions you claim, or the number of dependents you support.
• Have you changed jobs, started a home business, or rented out your second home? There may be over a dozen types of income that you must report, as they apply to your situation.
• Have you made payments on a mortgage, incurred medical expenses, or donated to charity? At the bottom of Form 1040, you may list any tax deductions, which in turn can reduce your total income to adjusted gross income (AGI).

As you can see, life changes are relevant to planning your tax strategies.

Another thing to remember is the importance of timing. Waiting until just before April 15th to start thinking about your taxes may prove to be a costly mistake. Like your financial strategy, your tax strategy operates in two time frames ? now and later.

• ‘Now‘ refers to the twelve months of the current tax year. The specifics of your income and the deductions available to you will certainly change from year to year, according to your changing circumstances. You may also be able to save money now by making small changes.
• ‘Later‘ refers to the long-range tax strategies that benefit your future. This includes maximizing the tax-deferred savings offered by a qualified retirement plan, such as a 401(k).

Either way, timing is critical and your planning can make a significant difference. By coordinating your tax strategies with your life changes and financial strategies, you may accomplish a variety of goals ? such as buying a home, funding a child’s education, and funding your retirement.

Tax-Saving Strategies for Individuals

Here are some tax strategies you may consider implementing:

‘ Lower your income tax by shifting income to other family members. However, watch out for the ‘kiddie tax.’

‘ Calculate the value of the tax benefits to see who should claim education tax deductions and/or credits ? you or your child.

‘ Consider your tax strategy for the near future. How will marriage, divorce, a new child, retirement, or other events affect your year-end tax planning?

‘ Take maximum advantage of your employer’s 401(k) plan, health savings account (HSA), health reimbursement arrangement (HRA), and Section 125 cafeteria plan.

‘ Consider filing separately if one spouse has many itemized deductions that are subject to a floor amount.

‘ For tax purposes, a deductible purchase is considered ‘paid’ when charged. If you need the tax deductions this year but don’t have ready cash, consider charging contributions, medical expenses, business expenses, and some state tax payments. Just remember to pay them off quickly to avoid increasing debt.

‘ Another tax strategy is to maximize your tax deductions by ‘bunching’ them together so you can meet the threshold requirements (e.g., only miscellaneous and job expenses that exceed 2% of your AGI can be deducted).

‘ Maintain accurate and detailed records. This can be especially useful for determining your gains and losses if you make periodic investments. Good recordkeeping will most likely help reduce your tax liability.

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