Tax season is always stressful (especially for new taxpayers) but becomes much easier to manage with a bit of preparation.
Sure, it’s easy to get overwhelmed by all the paperwork and the complexity of the US tax code.
But by getting your “ducks in a row” early on and working with experienced tax preparation professionals you’ll be able to eliminate a lot of the headache and hassle many new taxpayers face during their first tax season.
Below we highlight just a few of the most important tax planning tips you’ll want to consider going forward.
Let’s get right into it, shall we?
Start at the Beginning – Understanding Your Tax Bracket
Before doing anything else with your taxes it’s important that you have a firm understanding of the tax bracket that you’ll fall into this year.
That tax bracket is going to dictate (almost) everything about how you move forward from here.
The US has what is called a progressive tax system, which essentially means that the higher an individual’s income the more they are going to pay in taxes. There are seven different tax brackets at the federal level (as of 2021), running the gamut from 10% all the way up to 37%.
But just because you fall into a specific tax bracket doesn’t necessarily mean that all of your income is going to be taxed at that percentage.
You’re still going to be able to deduct different things from your tax liabilities and different “chunks” of your income may be taxed at different rates, depending on thresholds set by the federal government.
Even still, knowing the kind of tax bracket your annual income is going to put you into helps smooth the rest of the process out significantly.
Navigating Tax Deductions and Tax Credits
The next big piece of the puzzle to figure out as a new taxpayer is the difference between tax deductions and tax credits.
Both of these are going to help lower your tax liabilities, both of them can be used as effective strategies to reduce the amount of taxes you pay, but they both go about producing those results in different ways.
Tax deductions, on the one hand, are very specific expenses that you can deduct from your taxable income. This basically reduces the amount of income you can be taxed on.
Tax credits, on the other hand, can drop your taxes even more so as they represent a dollar-for-dollar reduction in your overall tax bill. If you get a $1000 tax credit, for example, you’ll be able to take $1000 exactly off of your taxes.
Use Strategic Tax Deductions (Standard vs Itemized)
Deciding on the type of deductions you’re going to use to lower your taxable income is a critical strategy and one you’ll want to be sure that you get right.
Standard deductions are basically a “flat deduction” offered by the US government, with Congress setting the amount of the standard deduction each year. In 2021, for example, the standard deduction for a single filer was $12,550.
Some people, on the other hand, choose to move forward with itemized deductions – especially if those itemized deductions can reduce their taxable income by more than the “standard deduction” rate for that year.
These itemized deductions do need to be backed up with receipts, however, in the event of an audit.
Certain tax strategies can make itemized deductions very powerful. Those that own a home, for example, can use deductions to save quite a bit of money by writing off mortgage interest and property taxes.
Because this is such a big decision, though, it’s definitely something you want to run by a proper tax preparer.
Protect Yourself with Smarter Record Keeping
Smart record-keeping will help significantly if you are ever audited by the IRS, something no one wants to undergo.
The IRS (generally) has about 36 months or three years to determine whether or not an audit should be conducted on a tax return. This means you’ll want to keep your tax records and your financial documents for at least that long, though indefinite record-keeping is never a bad approach, either.
If the idea of holding onto all of your financial paperwork for years and years on end isn’t all that enticing you’ll want to consider digitizing your records.
Even something as simple as taking clear photographs of your financial documents and uploading them to a cloud storage solution (something like Google Drive or Dropbox, for example) can help you better manage your records without having filing cabinets piled up in a spare bedroom!
Some Tips for Safely, Legally, and Ethically Lowering Your Tax Bill
While learning to master deductions and credits can help you cut down your tax bill significantly, there are a handful of other strategies you’ll want to consider implementing to lower your tax burden, too.
For starters, changing the amount of money you have withheld from your employer with each paycheck for tax payments can make life around tax time a lot less stressful.
Increasing the amount of withholdings you have taken from your check can guarantee that you don’t ever have to pay the IRS, and helps you land a bigger refund when your taxes have been filed.
Lowering your withholdings, though, can help bump up your individual paychecks – though you might find yourself on the hook for tax payments around April 15!
All of this can be done by filling out a W-4 form (available as a download right from the IRS) and submitting it to the payroll department or the HR department of your employer.
Secondly, you can take advantage of tax-protected (and tax-free) investment opportunities to lower your tax burden and set yourself up for success in your retirement.
Putting your money into a 401(k), for example, not only helps you to lower your tax burden each year (the IRS won’t tax you on any money you put into a 401(k)) it also helps you get his money from your employer towards your retirement, too.
Most 401(k) plans are matched by employers up to $19,500 per year. That’ll help you build your retirement nest egg in a hurry while lowering your tax responsibilities each year.
It’s also worth looking into IRA programs. Traditional IRA programs let you deduct the amount of money you’ve invested here from your taxes, whereas Roth IRA programs guarantee that the money you withdraw during your retirement is free from taxation, too.
Obviously, there are other ways you can lower your tax burden through proper tax preparation – but some of those are more complex and more involved, the kinds of things you’ll want to have professional help with.
Looking for More Personalized Tax Prep Help?
We’d love to sit down and talk about your tax situation and how you can protect as much of your income as possible – legally, ethically, and responsibly.
If you’d like personalized help for navigating the often confusing tax situation post-coronavirus, please don’t hesitate Robert Hall & Associates at your earliest convenience via the webform here, by phone at 818-242-4888 or reach me directly via email at [email protected].
