08 Aug 2020
5 minutes read
Secrets and Tips to Save on Taxes
Taxes are one of the highest expenses for most people, this is the reason why everyone wants to save on them. If you are employed, taxes are withheld for your paycheck and is sent to the IRS automatically. If you are self-employed, financial gain from your company or business is computed and remitted quarterly.
Taxes are unavoidable whether you are employed or self-employed.
But the amount of tax you pay can be lessened. To achieve that, you should have a plan in paying your taxes. You should consider creating a tax plan.
Tax planning is the analysis of a financial situation from a tax perspective to lessen tax liability.
Creating a tax plan is not easy at all. Because tax laws are complex in nature. But, when you take the time to study, understand and apply them to your advantage, you can really save a lot on taxes.
Here are some tips on tax planning and how you can use it to save on taxes.
What’s the Difference Between Tax Planning or Tax Preparation?
Tax preparation is the preparation and filing of tax returns. Tax preparers normally take the information provided by the taxpayers and record it appropriately and form a tax return.
While, Tax Planning is the analysis of a financial situation from a tax perspective, which helps you lessen your tax liability. It directly helps you save on taxes.
Tax planning is a totally different service to what is normally done by a tax preparer. It is important that you understand the difference between the two and discuss with your accountant about tax planning. Otherwise, if this has not been discussed they are just preparing your tax returns.
Tax Credit vs. Tax Deduction
Another thing you need to know when deciding to tax plan is a tax credit and tax deduction.
Both can help you in saving on taxes, but they do it in different ways.
Tax credits directly reduce your tax liabilities. They reduce your taxes, dollar for dollar. Here are some common samples of tax credits:
While a tax deduction reduces your taxes indirectly. You need to multiply the deduction by your tax rate to know how much you would save on taxes. In some cases, deductions are also considered write-off or business expenses. Here are some common samples of tax deductions:
Know Your Tax Bracket
Tax brackets allow you to know the ranges of income that are taxed.
The difference in tax bracket percentages is due to the Tax Cuts and Job Act but the techniques remain the same.
Just always remember that as your income increases, your tax rate also increases.
Aside from your responsibility of keeping proper records as a taxpayer, you should also keep a record of your filed tax returns and any other documents involved in preparing them.
This is required by the IRS, especially during audits. In addition to that, if you want to save on taxes, you and your CPA should know what the amount is you were paying. It’s the first part of your tax planning.
Common Strategies for Tax Planning
There are numerous ways to save on taxes, but here are the most common strategies you can consider when tax planning.
#1 Itemizing Over the Standard Deduction
If you want to save more rapidly in taxes, you should itemize deductions over the normal deduction threshold.
The normal deduction changes from year to year. If you itemize deductions on Schedule A over the standard deduction, you will have the chance to save on taxes.
#2 Retirement Accounts
Are you also looking forward to retirement? Then, you should consider retirement accounts.
These accounts not only prepare for your retirement and it has some level of tax benefits, too. So, the income you pay tax on is reduced.
Take note that there may be income restrictions or contribution limitations that may apply.
#3 Health Saving Accounts
Health Saving Accounts are tax-exempted accounts used for medical expenses.
Contributions you make for HSA are tax deductions and withdrawals from these are tax-free. Just remember that all transactions are made for medical expenses.
Everyone aims to save on taxes, but they don’t know where to start.
The good thing is that you do not have to learn the entire tax code and you do not have to do it alone.
Consider hiring a CPA or better yet try an accounting firm to assist you.
Working with a professional will help you recognize the full potential of what you could be saving.
You might want to consider DD Business Analyst. Contact us and talk with one of our professionals to develop your personal tax plan and save thousands!
Contact support@DDBusinessAnalyst.com our services.