Saving Money on Taxes
When it comes to saving money on taxes, there is always a lot to consider. What works for one person may not work for another. While some of the following suggestions are no-brainers and will surely save you money on taxes, others may contain some hidden traps. So get some good advice, consider all the details, and hopefully deny Uncle Sam a few bucks.
Retirement Plans (401(k), IRA, and other plans):
These are at the top of the list. For those who are early in their careers, a contribution to a Roth IRA can be a tax saver. It won’t save any money in taxes today, but when distributions are taken during retirement years, it is all tax free.
If your employer offers a 401(k) or some other plan, take full advantage of the contribution provisions. If your employer matches contributions, the more you put in, the more he puts in. Your contribution reduces your own taxable income and the matching contribution is just plain free money.
Business Income and Expenses
Business owners have some opportunities to save money as well. As most small businesses determine their taxable income using the cash basis (income is recognized when customers pay you and expenses are deductible when they are actually paid for) it is possible to accelerate deductions by paying some bills normally paid in January before December 31. The same principle works for income. Delay your year-end billings late enough in the year so that payments won’t be received before December 31.
Last minute deductions can be had without much effort. But be careful not to “buy” a deduction. Don’t just spend money on something because it will be deductible. Look for things that you have to pay anyway, such as a mortgage payment or property taxes. Prepay the January mortgage payment in December. If you have a property tax installment due in the early part of the following year, pay that in December too. Of course, you’re just moving the deduction from one year to another so it is always wise to take a multi-year approach. But if you need savings this year, pre-paying is a way to go. Be careful on the property taxes though. If you are subject to the AMT, that payment does no good since it is not deductible anyway. However, if you’re on the fringes of AMT spend some time and see if you’ll escape the clutches next year – then defer that payment to when it will benefit you.
Cash donations to a charity provide a tax deduction and can make you feel good about supporting a favorite cause. You can also make non-cash donations. The value of your old clothes, furniture, and household items are deductible. Be careful not to overestimate the values as the IRS pays attention. Keep good records on what you give away. Make a detailed list and determine a reasonable value for the items. Pile everything up and take a picture of it. Have as much proof as you can and always insist on getting the receipts – they are required documentation!
Another option for donations to charity is appreciated stock. If you’ve got some stuck away in your portfolio you can donate it and receive a deduction for the full fair market value. And then you’ll never have to pay tax on the gain that had built up since you acquired the stock.
If you are lucky enough to have equity in your home, you may be able to convert nondeductible credit card or auto loan interest into deductible interest by paying them off with a home equity loan.
Tax savings can be had just by spending a little time and considering the options available. Don’t waste them!
Greg Tanner – is a Tax Principal at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.