Millions of Americans stress every year during tax season, preparing their filings and doing everything possible to either avoid paying Uncle Sam a large bill or hopefully receive a refund in the mail. Most taxpayers grin and bear with this stress until April 15th, then don’t worry about it again until next year.
However, by understanding that taxes are a year-round issue, you can not only make preparing for them much simpler but also reap potential tax bill lowering benefits come next April 15th. Here are four basic strategies virtually anyone can use to start preparing for tax season early and get savings out of it:
Tax Burden Reduction Techniques:
- Contribute money to an IRA. Most financial planners will suggest this right off the bat; it’s not news. Surprisingly, though, many people eligible to do so never contribute. Besides being a great nest egg builder, IRAs also reduce taxable income. People under 50 can contribute a maximum of $5,500 a year; over age 50, the maximum amount increases to $6,500. All of that is money that is tax exempt at year’s end. Over the course of a career, that saves a significant quantity of cash.
- If you hold many market investments, inevitably some will lose money while others gain revenue. In that scenario, selling off the remaining losing investment and reinvesting that cash back into the market allows you to take a loss. That loss can then offset other taxable gains on your winning investments. Known as “tax-loss harvesting,” this technique can save up to $3,000 a year in taxable income.
- If you receive dividends from other investments, besides IRAs, make sure that they are qualified dividends. If so, then they can be taxed at a lower rate than income tax – 15%. Again, this creates savings that over time are will make an impact on your nest egg.
- Ask any athlete what the biggest key to success is and practice will likely be the answer. Adopt the same mentality when approaching your taxes. Doing a practice tax return in late summer, around July or August can give you a head start on the real work of tax season. You can take the time to adjust your holdings or start adopting other savings-minded habits that will help out later. Plus any potential problems can be addressed early too.
As you can see, sound tax preparation can’t begin soon enough.