Pay less tax, grow your wealth.
Here we are in the middle of the year and if you haven't started talking about or thinking about tax planning opportunities, now's the time. You really should have started back in January because effective tax planning is a year-round process not something you do as you approach April 15 and bothered by how much you owe in tax.
There are many ways to save on tax, and then use those savings to grow your wealth but for now we’ll cover five that many people can do right now whether you are a W2 wage earner or a business owner.
Number one is evaluate your documentation and record keeping process. Poor documentation is probably one of the most common causes of losing out on tax deductions that we see.
Poor documentation leads to lost tax deductions. Lost tax deductions leads to higher taxable income and higher taxable income leads to owing more tax which leads to a drain on your wealth by sending your money to the government instead of using it to grow your wealth.
That extra tax paid is usually a permanent cash outflow. If you found more deductions after you filed your tax return you could go back and file an amended return but most people don’t do that.
Inadequate documentation may take many forms, perhaps not keeping vehicle mileage logs and missing that deduction, perhaps not tracking home expenses and missing out on home office deductions. Perhaps simply not tracking charitable contributions and missing out on that deduction or tracking dependent care costs.
Number two is get some basic tax knowledge education even if you have to pay someone for some consulting time. You may not want to do your own tax return or do returns for other people but since the average worker will easily pay well over $100,000 in taxes across their lifetime, doesn’t it make sense that you should have a basic education on how the process works and be able to look for opportunities to lower that expense?
Back in an earlier article series there was a seven-part series called Anatomy of a Tax Return. The link to that first article is here. https://www.vwshi.com/blog/anatomy-of-a-tax-return-part-1-introduction
It was written using the 2021 Form 1040 but will be updated at some point in the future.
Another good learning source is sponsored by the AICPA – American Institute of CPAs called 360 Degrees of Financial Literacy. https://www.360financialliteracy.org/
Third, if you are a business owner or self-employed (that includes side gigs) do you have a good accounting system in place? Related to number one, an accounting system is critical to accurately capturing information on your business and reporting it at year end. That includes accounting for as many deductions as you legally can. Maybe that includes implementing QuickBooks or Quicken for better financial reporting documentation.
Fourth, review your most recent year tax return and look for planning opportunities there, missed deductions, expected changes for the upcoming tax season. Things that you had wished you had done but simply ran out of time before the April 15 filing deadline so filed as is and told yourself you’d do better next year.
Don’t wait until next tax season, start working on those now.
Five – Evaluate life events and the possible tax impact and plan now. Did you have a birth in the family? Congratulations and now a new tax deduction, possible new dependent care tax credits if you keep good records.
Was there a passing of a family member? If so, my condolences and be aware there could be tax consequences. I helped someone once whose spouse passed away a couple of years prior to meeting and they eventually sold the house, but sold it three months past a deadline and missed out on a $250,000 income exclusion opportunity. They ended up owing tens of thousands of dollars of tax that could have been avoided and redirected to their retirement goals by simply selling the house a little faster even at a lower price.
Perhaps one of your children who you have been getting tax credits for has now gotten older and no longer qualified for that credit. You could go from a small refund to owing tax simply because they got a year older and crossed an age threshold and you no longer get that tax credit.
A common one I see almost every year, your child went and got a job and now filed their first tax return without any guidance. They didn’t check the right boxes on their tax return and when the parents try to claim them as a dependent, their tax return is rejected by the IRS and they missed out on a dependent credit simply because the child filed their own tax return but didn’t check the right boxes.
The title of the article said 5 tax savings tips, but since you made it this far here is a bonus idea.
Number six, do not wait until tax season to start searching for tax help if you choose to have someone else do your return. Rushing to do your tax return near the deadline often results in errors or missed deductions. Even worse is rushing near the deadline and having to work with someone new who doesn’t have a history with your tax and finance situation.
Yes you can probably go last minute to one of those big chain places and get squeezed in, but remember, just because your return is done, does not mean its right, or that you have the best tax position you could be in.
There are people whose tax return is so simple that you could probably walk in to an appointment and after a 30-minute appointment walk out with a tax return. If your return is that simple you should probably be doing it yourself after getting some education.
If you have any level of complexity or even more so if you have self-employment income you should not be rushing to finish by the end of the appointment since that means you are possibly missing out on tax savings (wealth generation) ideas that could be claimed by simply slowing down and looking closer at your overall financial situation.
That could mean filing an extension to have time to gather more deduction ideas and if you are self-employed, perhaps even contacting me to open up a SEP IRA to get more tax deductions and start growing your wealth.
These just barely scratch the surface of tax planning / wealth generation ideas so get started now and build upon this as time goes on.
The information in this and other articles is intended to be educational in nature only. Not tax, legal or investment guidance for you specifically. Each person’s situation is unique and you must seek appropriate professional guidance that can address your unique situation.