When is tax time? Does April 15 stand out to you? This tax deadline is a common mistake that could cost you enormous amounts of money. Don’t wait! Starting to work on taxes the last few days of the year will limit money-saving options. Don’t allow doors of wisdom and savings to close.
Look at it this way; taxes can be a year-round sport. Your daily decisions of spending, borrowing and investing can be shaped into methodical choices that determine the amount that goes into your final tax report. The last section of the year, between Harvest season and New Year’s Eve can become an open opportunity to reevaluate how things are going and provide last minute changes to your tax plan.
Ready? Let’s get started: In early November figure your income thus far and see how it can be reduced before the IRS taxes it:
- Total up your earnings for the year (incl. salary, interest, dividends, investment profits, self-employment, rental income and other sources).
- Estimate the $ you expect to earn in the remaining portion of the year (in each category).
Now is where the fun begins! Let’s estimate your taxable income
- Make a list of your adjustments/write-offs to income (such as alimony and individual retirement account contributions.) These reduce taxable income whether or not you itemize deductions.
- Estimate your itemized deductions. Last years return could help. Approximation is fine.
With a handle on your taxable income, check the tax rates that apply. This tells you exactly how well your strategic movements will reduce taxable income. For example: If you are in the 28% tax bracket, every $1000 of deductions cuts your tax bill by $280. Your tax rate at the highest level is your Marginal Tax Rate. This is the rate you will save on every dollar of deduction.
Although the name of the game is to push income down and deductions up, in certain instances it could set you up for disaster. If your marginal Tax Rate is such that you are leaning toward the liability of the Alternative Minimum Tax (AMT), it may benefit you to increase the receipt of taxable income this year and put off paying deductible expenses, until next year. If you will be in a higher tax bracket the following year due to higher income, the same applies. Prudence in year-end tax planning involves looking ahead as well as dealing wisely with the year at hand.