Tax Planning Tips
Come March or April of any given year, people are anxiously looking for some last minute tax strategies to keep as much money in their own pockets and avoid giving it to Uncle Sam. Quite frankly, tax planning is a large part of one’s financial planning and should be implemented all year long.
For most people, there is a very simple tax formula to follow: Gross Income — Deductible Expenses = Net Taxable Income. The key is obviously to reduce your net taxable income as low as possible. Hence, you’d want to minimize your gross income and maximize your deductible expenses. Here is some tax planning tips to help you achieve these goals:
- You can lower your gross income by having some of your paycheck directed into a retirement plan such as a 401(k) or 403(b). In 2010, you can invest up to $16,500 from your income on a pre-tax basis ($22,000 if you are over the age of 50). This means you can lower your taxable income by $16,500 and work on another huge goal being retirement all at the same time.
- Another way to keep your gross income down is by not adding to it. You can defer capital gains on some investments you are up on and were thinking of selling. Often times it will be beneficial if you think that your tax bracket might go down or if you could have capital losses later on to offset the capital gains.
- Maximize your deductible expenses by taking advantage of tax credits and deductions. A tax deduction lowers your taxable income, while a tax credit is a dollar for dollar credit against your tax bill. Examples of some credits are the Child Tax Credit, Hope and Lifetime Learning Credit, Energy Saving Devices, Hybrid Cars Credit and Child and Dependent Care Credit.
- The most beneficial and common tax deductions are IRA contributions, Homeowner deductions, Medical Expenses, and Business and Personal Expenses.
Another beneficial tax strategy is to make sure you have the correct withholding from your income. This means that you have the proper amount taken out of your paycheck so that when tax time rolls around, you do not owe a large amount or get a large refund back. If you are getting a large refund you are essentially giving the IRS an interest free loan throughout the year. If you owe the IRS money, this could put you in an uncomfortable position and potentially expose you to unnecessary tax penalties.
These are just a handful of the many tax strategies that should be incorporated while financial planning for the future. It is strongly advisable to meet with a financial advisor and review your tax plan. At Clay Northam Wealth Management we are experienced in tax planning and can help you keep as much as your hard-earned money as possible. Servicing all of Southern California, we have two convenient offices located in the Los Angeles and Orange County. Please to not hesitate to contact our offices to see how we can be of value to you.
Note: This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.