Legal Ways to Lower Your Taxes

Most people wait until right before they have to file to start thinking about how to reduce taxes and increase the size of an income tax refund.

While late is better than never, the best strategy is to prepare for lowering income tax on next year’s personal return at the same time you are looking for money saving tax strategies on this year’s return. There are a number of easy steps you can take right now to increase your tax refund and reduce taxes both now, and in the future.

Tips and Tricks:

Hire a CPA

Tax software can be simple and great, updates make it easy to use, but tax laws are becoming more complicated each year - thank you IRS. A CPA can see unique tax advantages, and will be able to tailor your return to take advantages of deductions your software can miss.

Save All Receipts

You probably haven’t saved all of your receipts before for the current tax year. That is why it is advisable to create a system now for next year. A letter-sized accordion can sit on your desktop or on a shelf, open, waiting for receipts to be dropped in all year long. You can ask your CPA what categories are best, or if that’s too daunting, write on the back of the receipt what it is for, toss it in, and sort the receipts before tax time.

Get and Keep Receipts for Charitable Contributions

Many people give clothing, nick-nacks, furniture, left over garage sale items, boats or cars to charity, but few people ask for a receipt when they donate. Asking for receipts allows you to deduct most charitable contributions at tax time, even contributions not made in the form of actual money.

Don't forget to keep a good record of all cash donations too, even if it's just $5 here and there.

Get Organized

In addition to a file you will need to save all receipts for the year’s taxes. Make a list of other documents you will need stapling it to a folder you will use to store them in so you can reduce taxes on next year’s return. This step alone will save you hours of time and potentially thousands of dollars.

Itemize

Many people file a standard tax return forgetting deductions that could save a substantial amount of money by itemizing. You can itemize interest paid on a mortgage, although not really financially beneficial, and property taxes paid. You can itemize lots of miscellaneous expenses like tax preparation fees, job hunting expenses, professional dues, excise taxes on automobiles (think license plates or registrations), and state sales taxes (if they are higher than the taxes you paid in the previous year). Medical expenses that exceed 7.5% of your gross income can also be itemized and deducted.

Look for Home Office Deductions

There are restrictions on who can take the home office deduction, and who cannot, have loosened so even people who do not primarily work out of their home or who do not meet clients in their home, can sometimes take a home office deduction. Best to check with your CPA.

For example, if you have no fixed location for your place of work (as is true for salespeople who tend to travel a lot, doctors who consult at various clinics or hospitals and so on...) you can claim that part of your home you use for administrative and managerial work as a home office. Deduct a percentage of the rent or mortgage, utilities based on the square footage of that space, office equipment and supplies.

Don't Overpay

Many people look forward to a large tax refund check each year, bad idea. Consider that when you get a large refund each year you are actually giving the government your money interest free. If you divide that yearly refund into monthly deposits into a savings account, or other investment, you will earn interest, and if you invest what you would get as a refund into a Roth IRA you will end up that better off in retirement. If you make a tax deductible contribution to a worthy charity you’ll have a deduction and an even better return over time. Although it doesn’t feel like it, paying a manageable amount each year at tax time is actually better than getting a large refund each year.

Make a Last Minute Estimated Payment

If for some reason you are facing penalties because you underpaid your taxes (maybe your withholding was incorrect or you had an unexpected windfall), you can make an April 15th estimated payment and avoid the fees, so long as you didn’t also underpay during the first three quarters. Even if you did underpay all year, you can file Form 2210: Underpayment of Estimated Tax by April 15th, and reduce your penalties.

Open an IRA

I am not a fan of IRA's because when you begin to make withdrawals in retirement they are fully taxable, and taxes have never gone down, they only go up. So you get a duduction now, you pay for it later when you can afford it less. When living on much less who can ill afford to pay increasing taxation. Also, financial advisors never mention that inflation eats away at the value of your IRA, which is a double hit to your IRA – taxes and inflation.

You can open and contribute to an IRA right up until April 15th and claim a deduction on the previous year’s tax return. An IRA is the only kind of retirement account you can do this with. Keep in mind that Roth IRA contributions are not tax deductible, so if you are looking for the deduction, make sure you are using a traditional IRA.

A Final Note

With a little planning and a bit of organizational discipline, anyone can reduce taxes and save money, money you can invest for a better future. The smartest money saving tax strategies are continuous, so practice good habits today and look forward to keeping more of your own money tomorrow and every day thereafter.

If this website helped you find your financial future we ask you to please give as a way to say Thank You. Not only does it support this site, is is a way to give it forward so others may find their way toward financial security. Please consider giving today. Thank You.

top of page