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Tax Season Tips
Once again it's that time of year to file your tax returns. In order to reduce the taxes you have to pay, consider some of the following tips before you finalize your tax return. There are many changes in the tax laws each year that affect deductions, credits and ways to minimize what you owe.
Before you get started, organize your tax information by separating your income tax reporting forms such as W-2s, 1099s and Schedule K-1s from your deduction forms such as mortgage statement, taxes paid and charitable contributions.
It is important to make sure that all items reported to the IRS on these forms be shown in the proper place on your tax return. Due to technology improvements and computer matching, failure to report an item on your return will most likely generate a notice or tax assessment from the IRS.
While it's important to report all taxable income, it's just as important to claim all of the deductions and credits that you are entitled to. Reducing your taxes to the lowest level possible will create more funds to save and invest.
The Alternative Minimum Tax (AMT) applies to a greater number of taxpayers each year. Individuals should prepare Form 6251 to determine if AMT applies, otherwise the IRS will calculate the amount and bill for any tax owed. The AMT is basically a flat tax system with limited deductions.
Taxpayers who have paid AMT in a prior year may have a minimum tax credit carry forward to use in the current year if their regular tax is now greater than their AMT. Make sure any AMT credit is carried forward and tracked for future use. Some taxpayers are unaware of this credit and fail to claim it.
State and local tax refunds may not be taxable if no benefit was received in a prior year due to AMT or claiming the sales tax deduction. Do not assume that refunds are fully taxable.
Penalties may be assessed if not enough tax was withheld or paid to the IRS. Consider Form 2210 to reduce potential penalties if your income increased significantly from a prior year or if a portion of your income was earned late in the year.
While the items discussed can help you reduce the taxes you owe from last year, now is also the time to consider what you can do to reduce your taxes this year to create more discretionary income to utilize.
If you are receiving a large refund, consider changing your withholding level by submitting a new Form W-4 to your employer. Why let the IRS hold your money all year without paying you interest.
Analyze your expected deductions, exemptions and credits and then complete the W-4 worksheet to calculate how many exemptions you can claim. Many individuals mistakenly believe that they are limited to claiming a withholding exemption solely for spouses or dependents. If your deductions are high enough, you may claim more.
Some people feel that they would be tempted to spend an additional amount received in their pay check from reduced withholding instead of saving it. Possibly, they consider a large refund every year as a bonus or forced savings. However, there are other options that can stimulate systematic savings without using the IRS. For example, you can set up an ACH or automatic withdrawal from your account or paycheck to have the money deposited directly into some type of savings or retirement account. So instead of having money deducted from your income and held by the IRS all year, have that money grow in your own account.