There’s an old saying that two things in life are unavoidable: death and taxes. While neither are events most New Yorkers look forward to, a little planning goes a long way when it comes to taxes.
Unfortunately, tax laws seem to change quite often. Rarely do these changes make tax time less confusing. However, some tax planning strategies are evergreen.
Understand the difference between a credit and a deduction
Each year, the IRS introduces new tax credits and deductions.
These are meant to reduce our tax burden, but they are not the same thing.
In brief, tax deductions are items that you can use to reduce the amount of your income that’s subject to taxation. Consider things like business expenses, interest, and certain purchases. However, they are calculated as a percentage in most cases, such as the square footage of your home that can be claimed for business use.
Tax credits, on the other hand, are equal dollar amounts that can be subtracted from your tax bill. For example, a tax credit of $1,500 for improving energy efficiency removes $1,500 from the amount you owe.
Know when to itemize and when to use the standard deduction
It would be a mistake to assume that you can lower your tax liabilities by deducting every paper clip you purchase. Sometimes, the standard deduction can work more in your favor. It’s also faster and less complicated.
Rather than itemizing manually and comparing that amount to the standard deduction for your filing status and return type, run everything through an automated tax software. These keep up with the most current amounts, and they can flag items that might be problematic.
Protect your income through legal tax shelters
When people think of tax shelters, charitable contributions and shell companies come to mind.
However, there are smart money tactics that anyone can use that are perfectly legal, available, and help you prepare for retirement.
Talk to your accountant about the tax advantages of things like:
- Retirement accounts, such as 401Ks or a Roth IRA
- Dependent Care Flexible Spending Accounts (DCFSAs)
- Health Savings Accounts (HSAs)
No matter if you’re an individual, a small business owner, or the head of a large corporation, these tax planning strategies will go a long way toward helping you keep more of your money while avoiding scrutiny from the IRS.