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Tax Planning Basics

A great article I thought I would share with you.
Tax Planning Basics 3 Ways to Reduce Your Taxes
 
The goal of tax planning is to arrange your financial affairs so as to minimize your taxes. There are three basic ways to reduce your taxes, and each basic method might have several variations. You can reduce your income, increase your deductions, and take advantage of tax credits.
Reducing Income
Adjusted Gross Income (AGI) is a key element in determining your taxes. Lots of other things depend on your AGI (or modifications to your AGI)-- such as your tax rate and various tax credits. AGI even impacts your financial life outside of taxes: banks, mortgage lenders, and college financial aid programs all routinely ask for your adjusted gross income. This is a key measure of your finances.
Because your adjusted gross income is so important, you may want to begin your tax planning here. What goes into your adjusted gross income? AGI is your income from all sources minus any adjustments to your income. The higher your total income, the higher your adjusted gross income. As you can guess, the more money you make, the more taxes you will pay. Conversely, the less money you make, the less taxes you will pay. The number one way to reduce taxes is to reduce your income. And the best way to reduce your income is to contribute money to a 401(k) or similar retirement plan at work. Your contribution reduces your wages, and lowers your tax bill.
You can also reduce your Adjusted Gross Income through various adjustments to income. Adjustments are deductions, but you don't have to itemize them on the Schedule A. Instead, you take them on page 1 of your 1040 and they reduce your Adjusted Gross Income. Adjustments include contributions to a traditional IRA, student loan interest paid, alimony paid, and classroom related expenses. A full list of adjustments are found on Form 1040, page 1, lines 23 through 34. The best way to boost your adjustments is to contribute to a traditional IRA.
As you can see, two of the best ways to reduce your taxes is to save for retirement, either through a 401(k) at work or through a traditional IRA plan. Contributions to these retirement plans will lower your taxable income, and lower your taxes.
Increase Your Tax Deductions
Taxable income is another key element in your overall tax situation. Taxable income is what's left over after you have reduced your AGI by your deductions and exemptions. Almost everyone can take a standard deduction, and some people are able to itemize their deductions.
Itemized deductions include expenses for health care, state and local taxes, personal property taxes (such as car registration fees), mortgage interest, gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses. One key tax planning strategy is to keep track of your itemized expenses throughout the year using a spreadsheet or personal finance program. You can then quickly compare your itemized expenses with your standard deduction. You should always take the higher of your standard deduction or your itemized deduction.
Your standard deduction and personal exemptions depends on your filing status and how many dependents you have. You can increase your standard deduction and personal exemptions by getting married or having more dependents.
The best strategies for reducing your taxable income is to itemize your deductions, and the three biggest deductions are mortgage interest, state taxes, and gifts to charity.
Take Advantage of Tax Credits
Once we've tweaked our taxable income, we are ready to focus our attention on various tax credits. Tax credits reduce your tax. There are tax credits for college expenses, for saving for retirement, and for adopting children.
The best tax credits are for adoption and college expenses. Not everyone is in a position to adopt a child, but everyone could take some college classes. There are two education-related tax credits. The Hope Credit is for students in their first two years of college. The Lifetime Learning Credit is for anyone taking college classes. The classes do not have to be related to your career.
You may also want to avoid additional taxes. If at all possible, avoid early withdrawals from an IRA or 401(k) retirement plan. The amount you withdraw will become part of your taxable income, and on top of that there will be additional taxes to pay on the early withdrawal.
One of the best, and most abused, tax credit is the Earned Income Credit (EIC). Unlike other tax credits, the EIC is credited to your account as a payment. And that means the EIC often results in a tax refund even if the total tax has been reduced to zero. You may be eligible to claim the earned income credit if you earn less than a certain amount.
Increase Your Withholding
You can avoid owing at the end of the year by increasing your withholding. More money will be taken out of your paycheck throughout the year, but you will get bigger refund when you file your taxes.

Financial Planning

Personal Financial Planning is about:
  • Managing risks to avoid financial dependence;
  • Savings and investments to achieve financial independence;
  • Capitalizing on strengths;
  • Minimizing weaknesses; and
  • Attaining goals.
 
Sounds simple enough, right????  Not so much….This process can be very involved because it includes many different parts, such as, communication, external and internal analysis, liquidity/debt/performance ratios, developing an financial mission, performing a SWOT analysis and identifying your goals.
 
While on the one had this seems very cumbersome, it can be quite an interesting and fun process.  Truly understanding your current financial position and identifying your financial goals are very rewarding.  Whether you simply want to understand your financial position through Personal Financial Statements or you want to set up a complete Financial Plan, we can help. Give us a call today!!
 

Personal Finances


Overwhelmed by your monthly bills?  Wish you were more organized?

We can help…send us your mail and we will organize your bills, set you up on a monthly budget, process payments and track your spending. 

This will free you up to spend time on the things you enjoy

Did you know that setting up a monthly budget, among other things, enables you to produce extra money?!?!?!

Budgeting is key for:
·         Giving you control of your money;
·         Keeping you focused on your financial goals;
·        Organizing your spending and savings;
·         Enabling you to save for expected and unexpected costs;
·        Enhancing/simplifying communications about money with your significant
          others;
·         Providing you with an early warning for potential problems; and
·         Helping you determine if you can take debt and how much.

Let us put you on the right track and reduce the stress
associated with your finances.

Get Organized

Did you know that there are many benefits to implementing an accounting system for your business?
 
Be more organized and save time
Easily track your sales & expenses
Maintain records for tax time
 
If you're using spreadsheets or manual methods, you could save a lot of time by switching to accounting software.  It will help you organize your finances, so you can quickly find items you need every day and at tax time.  Even if you're just a solo at-home operation, you can benefit from having organized financial records.  
 
Most small business owners don't enjoy tax time.  However, accounting software can make it more bearable.  It helps you keep reliable records, so you'll have the information you need to complete your taxes with ease.
 
Let us help you get organized!!  We can quickly set up your in-process or new business and manage the business for you or transfer the software for you to use going forward.  There are also mobile apps that will allow you to easily and quickly monitor upcoming appointments, outstanding vendor payments and customers who owe you money. Plus we can provide a wide variety of different reports such as budgets, income and expense trends, financial ratios, etc.
 
Give us a call.  It is much easier than you think!

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As you have seen throughout our website, we offer a number of accounting and tax services and will work with you and/or your company to design an engagement, large or small, to meet your needs AND YOUR BUDGET.  Be sure to follow us on Facebook and Twitter for interesting "DID YOU KNOW" tips of the day (refer to the home page for these links).

This is a family run business and our primary focus is customer satisfaction.  In fact, you are the best advertising we can invest in.  So, give us a call or send us a message and let's work together to bring your finances to the next level (or just work on saving you some money).

Until next time...The Friendly Accountant.
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