Everyone knows that you have to file your taxes every year, yet many don’t know there is actually a science to how you do it. Tax planning involves efficiently analyzing and arranging your financial situation in a way that maximizes the tax breaks you receive while minimizing tax liabilities according to the IRS’s regulations. While taking the time to prudently understand viable tax planning strategies can be time-consuming, it’s an essential part of the process. With savvy tax planning strategies from our Charleston financial planners, you can save and streamline for years to come!
Tax Planning Strategies to Reduce Your Liability
#1 – Get Organized & Keep Records
Filing taxes would be a lot simpler if all we had to do was supply an estimate. Since that’s not a realistic option, it’s important to stay organized. All things considered, investing in a filing system to help you keep your affairs in order is worth it. Doing so will help you store and reference the necessary paperwork for minimizing your tax liabilities. In this filing system, make sure to keep any and all receipts for activities that you plan to deduct, credit-worthy actions, and tax forms before submitting them.
Having the help of a tax planning professional, especially when it comes to record-keeping, can make all the difference. That way, you know exactly what you need to be storing for the next tax year. And, in most cases, the IRS has three years to inform you of an impending audit, so it is important to keep everything organized and readily available for at least that long. If you make a claim to write off worthless securities or bad debt, you should save your records for at least seven years.
#2 – Make Your Money Work for You
When it comes to tax planning and inflation, cash is not king. Put your money to work with the purchase of tax-deferred or tax-exempt securities. Municipal bonds and US savings bonds are often less volatile investments and may offer valuable tax considerations for your savings. Municipal bond’s interest income is federally tax-free and tax-free to the state if the bond is from your state.
US savings bonds are taxed federally yet exempt from state and local tax considerations. There are also some higher yield money markets that are FDIC insured and available wherever you live. The goal is to keep up with the rising cost of living, with minimal risk, and minimal upkeep. Reach out to our Charleston investment advisors to learn more about how to use short-term fixed income investments, diverse bonds, and higher-yielding money markets.
#3 – Keep Your Eyes on the Prize
In planning for the short term, don’t forget about your long-term financial goals, especially if you dream of early retirement! The IRS allows you to contribute up to $6,000 per year for a traditional IRA account, and if you’re over 50 it’s $7000. If you have no other retirement account or make under a certain amount of money for your tax filing status even with another qualified retirement account, these contributions are tax-deductible. We have a helpful blog available here to acquaint you with the rules regarding IRA contributions.
Your employer may offer a retirement plan, and this is another way to set aside funds for the long term with built-in tax benefits. Employer-provided retirement plans are valuable ways to save and prepare for your golden years. The added advantage of payroll deduction makes it even easier – out of sight, out of mind. If you have any questions, a Morris tax planning expert can help you strategize and secure your golden years!
#4 – Avoid Common Tax Planning Mistakes
Some of the most common (and easy to avoid) errors when it comes to filing taxes include simple miscalculations, missed due dates, and filing the wrong form. Yet, these accidents can lead to hefty fines or even trigger an audit from the IRS. To prevent this from happening, you should always double-check your work and use a calculator if filing on your own, just like you would with a math test. Double-check to see that every number is entered in the correct box, and make sure your name is spelled correctly. Accidentally skipping a line or misplacing a decimal point could cost you thousands.
Business taxation requires a series of forms for different scenarios and situations. Alternative income streams require 1099 forms to claim revenue from contracting work, interest, dividends, capital gains, and other miscellaneous income. Be sure to read your requirements very carefully and consult a tax professional if you have questions. If you know you won’t be ready by the filing deadline, don’t put off filing for an extension. Be careful though, and don’t get too complacent – the extension is only for the tax return itself. The taxes are due upon the due date for filing your tax return even if you do file an extension. So, you need to do your best to determine approximately what you’ll owe and pay that in a timely manner. Taxes paid after the deadline have steep penalties.
Review our Tax Document Checklist.
#5 – Work with a Tax Planning Professional
Finances are tricky, and taxes are no exception. If you’re preparing taxes on your own, our Charleston tax advisors invite you to look through our available resources to help you as you go. For those that may feel more comfortable with the help of a professional, we are here to help. No matter your situation, the reality is that most people would benefit from a consultation with a professional tax advisor. To speak with an expert who can help minimize your tax burden, maximize your return, protect you from an audit, and develop a long-term wealth management strategy, reach out to one of our Morris tax planning professionals for a complimentary consultation today!
The opinions expressed herein are those of Morris Financial Concepts, Inc. (“MFC”) and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. MFC relies on information from various sources believed to be reliable, including third parties, but cannot guarantee the accuracy and completeness of any third-party information. MFC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about MFC including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. Certified Financial PlannersTM (CFP®) are licensed by the CFP® Board to use the CFP® mark. CFP® certification requirements include: Bachelor’s degree from an accredited college or university, completion of the financial planning education requirements set by the CFP® Board (www.cfp.net), successful completion of the CFP® Certification Exam, comprised of two three-hour sessions, experience requirement: 6,000 hours of professional experience related to the financial planning process, or 4,000 hours of Apprenticeship experience that meets additional requirements, successfully pass the Candidate Fitness Standards and background check, agree annually to be bound by CFP® Board’s Standards of Professional Conduct, and complete 30 hours of continuing education every two years, including two hours on the Code of Ethics and Standards of Professional Conduct. MFC-21-07.[MS4]