7 minute read
What’s worse than paying money to the IRS come tax time? Overpaying in taxes! You may be surprised to learn that you could have been overpaying the IRS for years. This is because many people don’t take advantage of the various tax credits and deductions available to them. If you would like to learn how to pay less money in taxes, you’re in the right place.
So, how do you get started saving money on taxes? First, you need a tax plan. Tax planning is when you analyze your life and business to optimize your situation, leading to lower income and less to pay in taxes. In short, tax planning is how you can save money on taxes.
There’s really only a few ways to save money on taxes – reduce your income, qualify for credits, or qualify for deductions. Here, we’ll focus on how to maximize credits and deductions for a reduced tax bill. The main difference is that tax credits reduce your tax liability, whereas deductions reduce your taxable income.
There are also deductions, which reduce your overall taxable income. Deductions may be before adjusted gross income (“above the line” deductions) or after adjusted gross income. The most common deduction after adjusted gross income is the standard deduction.
A credit reduces your total tax liability by effectively acting as tax paid. There are many tax credits, but not everyone will qualify for every credit. Certain requirements must be met. For example, taxpayers who aren’t parents cannot claim the child tax credit. If you have no business, you can’t claim one of the many business tax credits available. All that said, there are likely a variety of tax credits that can fit your situation.
There’s no shortage of ways to save money on taxes. Here are three quick ideas you can implement to reduce your overall tax bill:
Tax Saving Strategy #1 — Be Mindful of When You Pay Taxes:
If you have long-term capital gains, there are tax deferral strategies you could consider. For instance, if you have long term gains and short term losses, you could strategically sell both to offset the gains. If you own investment property, you may be able to make use of a 1031 Exchange, which allows you to essentially swap properties without triggering the capital gains. Of course, talk with a tax advisor about possible capital gain scenarios for your individual portfolio. Also, keep in mind the wash-sale rules about buying and selling within 30 days.
? You can potentially lower your taxes just by accelerating or deferring certain transactions that you might do anyway.
Tax Saving Strategy #2 — Maximize Charitable Contributions: You can deduct cash donations to public charities as a portion of your adjusted gross income. You can also make qualified charitable distributions from an IRA directly to a charity if you’re over 72 years of age. You can even donate real property! In short, there are many ways to reduce taxes by giving to charitable causes. With many options available, talk with a tax advisor about what gifts might benefit you personally.
? Giving to charity is a great way to reduce your tax bill, and there are multiple ways to go about it.
Tax Saving Strategy #3 — Use Tax-Advantaged Saving Methods: You may decide to reduce your taxable income by simply increasing your salary deferrals to 401(k) or SEP-IRA plans. The potential for tax-free growth within a Roth IRA is also significant and should be considered. In addition to retirement plans, tax-advantaged health plans such as a health savings account (HSA) or an education plan like the 529 account can all reduce your tax obligation.
? There are certain programs that the government has built to be tax friendly, so be sure to take advantage of them.
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As mentioned earlier, tax planning is all about how to save money on taxes, and individual tax planning revolves around arranging your finances to maximize deductions and credits. The goal is to reduce your tax liability legally. Once you’ve taken advantage of all the individual tax planning strategies you are eligible for, the next step is often to look at your business.
For starters, every business owner should be ensuring their business entity is the most tax-efficient option for their situation. While it’s true that entities are often chosen for legal reasons, such as to limit liability or to have certain ownership options, each entity has specific tax consequences.
The IRS taxes business entities in the following ways:
Even if you are being taxed a certain way, it’s possible to switch your entity type or elect to be taxed differently. For example, LLC members can elect for their business to be taxed as a C corporation, as a disregarded entity, or as an S corporation. Making an entity switch like this could have a significant impact on your tax bill.
Many small businesses are organized as a Schedule C, yet it rarely makes sense for a business owner to remain a Schedule C. To minimize taxes, it could be advantageous to move to an S Corporation, Partnership, or even C corporation.
Besides changing business entities, there are many ways for a business to maximize deductions. One such tax planning strategy is the administrative home office. Imagine a doctor has a home office that they use to complete administrative tasks related to their practice. They can do bookkeeping, billing, and review patient files in this home office space.
This doctor could establish this home office as an administrative office, then deduct the mileage between the home office and the medical office where they see their regular patients. This simple mileage deduction increases the dollar amount the doctor can deduct on their tax bill.
Another strategy available to business owners is called the Augusta Rule, or the Section 280A exclusion. This particular provision allows you to rent your own home to your business to host business events, such as quarterly board meetings. You can exclude the income from the rental on your personal return, but still take the rental cost deduction on your business return.
These and other types of more advanced strategies are available. If you don’t want to spend significant time researching, you can talk to your tax advisor or use specialized tax planning software such as Corvee. With over 70,000 pages in the tax code, not many people have the time or energy to maximize their tax plan completely, but implementing any tax plan is better than no tax plan.
Want to start saving money on taxes immediately? Check to see if you are eligible for some of the more well-known tax credits, such as:
With such substantial tax law changes going on all the time, tax planning will continue to evolve in future years. Credits come, and credits go — and can become nearly impossible to stay up-to-date with all the yearly changes!
If you don’t take advantage of technology to help with tax planning, you will have to calculate the tax savings given what you know off the top of your head. When you start factoring in multiple years or entities, it becomes much more difficult to find all the tax savings.
If you’d like an automated way to save money on taxes, look into Corvee software, which takes into account over 1,600 tax strategies and shows you what you’re eligible for each year given the data you input. If you think you’re overpaying the IRS, it’s worth giving it a test drive!
See how Corvee allows your firm to break free of the tax prep cycle and begin making the profits you deserve.
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