Paying taxes is everyone’s responsibility and failure to do so is punishable by law. Planning for tax payment can help you avoid trouble with the IRS and reduce the amount you pay to them through stringent but legal means. Without proper tax planning, you cannot make sound tax moves and this may make you incur painful costs through hefty penalties and legal suits. To meticulously plan for your tax returns, the following are the little hacks you need to be aware of. They not only help you plan for filing tax returns, but they may also help you shelter some parts of your income from taxation, and this is more money in your pockets. This article looks at tax planning tips you should know.
- Pay Your Taxes in Time
Let us face it; no one feels good when that huge chunk of money is being sliced out of your hard-earned money by the taxman. This, therefore, means that it is very easy for anyone to ignore and forget filing their tax returns, something that comes haunting you down later. To avoid this future stress, file your tax returns before the deadline. This way, you stand a chance of getting a tax refund when you file more returns beyond your tax bracket. You may also be allowed to pay your tax arrears in installments when things go south.
- Keep Your Tax Documents
The IRS keeps making tax audit when they realize that you have been having problems filing your returns. Sometimes it is not always because of your making; it is because of theft identity or technical errors on the part of the IRS. When this happens, only the documentation of your tax returns can save you; they act as proof of the filing that you made. The documentation may also help you argue your case when you request to be exempted from tax deductions when things go south.
- Reduce Your Taxable Income
You can implement several hacks to reduce your taxable income; things that the IRS will not tell you. Such hacks are things that are not stipulated in the law but they are however allowed; they help you pay lower tax rates than you would have otherwise paid. What most of us do not know is that the government divides your income into different chunks and taxes each of these chunks at their corresponding rates. Among the many ways through which you can reduce your taxable income include tax deductions, tax credits, and claiming allowances such as medical and house allowances.
- Invest in Tax Exemptible Schemes
Another great way of planning for lower tax rates is by investing in schemes that are exempted from tax or have some tax advantages. Even as you do this, you will want to check the federal or state changes concerning such investments because they differ from state to state and are subject to adjustments. For example, most mutual fund investments have tax benefits.
- Understand Your Annual Gross Income
Understanding your gross annual income is the first step to proper and effective tax planning. It helps you understand just how much your annual amount of income from all sources and including investments. Supposing you missed to include one source of income from one of your many investments and the IRS comes looking during an audit. Since you do not want such surprises, take time to understand your annual gross income from all sources so that you are aware of how much you owe the taxman.
- Income Splitting
Your family members can help pay lower tax rates so make good use of this strategy. Let us say your annual gross income is such a huge figure; the government will divide that amount into smaller chunks where each chunk is subject to taxation at their corresponding rates. With this in mind, you can reduce the taxable amount of your gross annual income when you share it amongst your family members. Each of the shared amounts may be taxed under just one bracket, hence lower tax rates.
Tax laws keep changing and they also vary from one state to another; so you must confirm whether the next money move you look forward to applying in your planning is still valid or not. This will not only help you dodge your way into lesser tax rates, but it will keep you at bay with trouble with the IRS. Since such tax planning strategies are not stipulated in the law, a tax expert can help you understand them.