When the government levies its tax bill, it expects you to pay. However, people often pay more than their fair share of taxes, which means a loss of income.
Conversely, when you discover tax-saving tips, you’ll end up boosting your income.
The tax laws change often. Most people don’t realize this and continue paying the same taxes as they did before the changes. Therefore, it pays to keep up with these changes.
For instance, did you know that if you earn money on the side, you may now qualify for a 20% tax deduction on that income? That was part of the Trump tax cut bill, called the qualified business income deduction.
Taking it reduces that portion of your annual income by 20%, which could push your total income down enough to drop into a lower bracket! Add to that some judicious IRA contributions or a personal 401(k) and your taxes fall even more.
Entrepreneurs who run their own solo 401(k) have the same contribution limits of employees of big companies, plus they can add on profit-sharing.
This can get pretty extreme. The 2021 limit is $64,000 in tax-deferred contributions.
Similarly, if you have a high-deductible health insurance plan, you can open a health savings account (HSA) and reduce your income by up to $8,200, again cutting your top-line tax bill by simply squirreling away income.
HSA money rolls over forever (or at least until retirement), so many folks think of it like a second, secret IRA.
When seeking advice online on how to save on taxes, pay attention to the publication dates. You could set yourself up for a rude awakening if you follow advice that is old or irrelevant.
Some websites hide the dates of their articles. This makes the task of finding current information challenging.
Sometimes, you can tell when it was published by the comments, which can include the dates even when the article doesn’t.
Hiring a tax pro
Reading through tax codes and verifying information from financial websites is not always on many readers’ agenda. A tax professional may be the right solution for these readers. Finding the right professional takes time but is well worth the effort.
Search for professionals who specialize in taxes. Accountants may know taxes, but if it’s not their specialty, they won’t have the background to address all your needs.
A specialist may cost more, but a qualified person will end up saving you more than the fees charged.
When you line up a few candidates, ask a lot of questions. Also, describe your financial situation completely.
Verify the references of the candidates you are considering. Paying high fees for the wrong professional is counterproductive.
A financial planner or advisor may or may not have a background in taxes. As with accountants, they may know about tax ramifications at a high level. But they may not know enough about the tax code to advise you for specific situations.
You may find that if situation is simple but you are nevertheless a high earner (business income but no employees, for instance) that using online tax prep such as TurboTax is perfectly fine.
You are ultimately responsible for your financial decisions (and you will sign your own tax returns!).
You may find advice online or qualified advisers, but if their advice leads you astray, blaming it on others will not matter. Your financial position still took a hit.
It takes a bit of research to save on taxes. But the results will be something you can take invest to grow for the future.