Taxes are one of life's certainties, and no one likes giving up some of their hard-earned cash. With proper tax preparation, however, it's possible to pay less in taxes or receive a larger refund at the end of the year. While paying taxes is inevitable, there are several ways to diminish your tax burden and end each year with more money. Proper tax planning makes it easier to build your personal finances and afford the things you want.
Additionally, by anticipating taxes when you create your financial plan, it's possible to significantly boost how much money you will have in retirement. Many elements of tax planning are quite simple, but it's always worth speaking with a professional at a local bank who can offer additional guidance on how to successfully work within the tax system.
A tool for retirement
Saving for retirement is difficult under any circumstances, and it can be even harder to set money aside after taxes. Luckily, many retirement savings options allow you to set money aside without paying taxes on that income. Once that money has been placed in a separate account, it can gain value based on interest or investments. You will not be charged taxes on that money until you remove it from the retirement account. By that time, it's likely you'll be in a lower tax bracket and need to pay significantly less, according to TurboTax.
While these accounts do not let you eschew taxes entirely, deferring payment allows you to maximize your savings and minimize the amount of taxes that eventually need to be paid. A range of other accounts offer similar provisions, including Health Savings Accounts that remove money from your paycheck before income taxes are taken out, and Dependent Care Savings Accounts.
Take a long-term approach
Tax planning offers short and long-term benefits, but you'll want to take a long view of your financial situation to maximize savings. If you anticipate an increase or decline in your income during the next few years, start catering your financial plan to the upcoming shifts ahead of time, according to CNBC. Figure out if it's best to pay taxes on that increased income right now, or if you should try and put it all into tax-deferred accounts that may incur taxes later on.
Consider every part of your financial life
Taxes affect so many parts of your life that you may forget different ways to save. If you fail to consider the tax implications of a big financial decision, you could end up wasting a lot of money. The tax laws surrounding home sales can be particularly painful for uninformed buyers and sellers, according to MarketWatch contributor Bill Bischoff. For example, people can get an exemption on capital gains taxes on a home sale if they file jointly with a spouse.
This can result in massive savings for couples, but far too many people fail to consider this factor when they list their home. By speaking with a financial professional before taking any financial action, you can prevent yourself from accidentally missing out on significant tax exemptions.
Go itemized or standard
Whenever you file your taxes, you have the option between taking the standard deduction given to all filers or creating a custom deduction by listing your expenses for the year. Either option can offer better savings, depending on your financial situation, so you'll want to evaluate exactly how your financial life changed during the past 12 months. With proper tax planning, you can make your financial life much easier and pocket additional money along the way.