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Posted by David Gollner

Tax Saving Tips

Tax Saving Tips

At Innovation Tax Service, our clients are our most important asset. Often, we hear a phrase so common that it almost sounds cliché: how do I save money on my taxes? Admittedly, it isn’t the most obvious to know where to begin, especially with a multitude of contradictory theories on how to go about saving money. This is further complicated by the fact that the IRS has a habit of adjusting what is and what isn’t valid for tax deductions. So, it comes as no surprise when we are contacted by exasperated clients who are confused. That’s why we recommend our services, as you’ll save time and money when you Find a Tax Professional For Tax Saving Tips. Let’s take a look at ways you can reduce your tax burden.

Contributing to Your Retirement

Retirement is one of the best ways to save money for your tax burden this year. If you have not funded your retirement account for the tax year 2015, don’t despair. You can stil do so by the April 18, 2016 deadline. This deadline is for contributions to traditional IRAs (deductible or non-deductible), and also to a Roth IRA. If you have a Keogh or SEP (Simplified Employee Pension) and you get a filing extension to October 17, 2016, you have the ability to wait until then for putting your 2015 contributions into those types of accounts.

What are the benefits of this approach? First, by making a deductible contribution, it will help you lower your tax bill this year. Second, your contributions will be compound tax-deferred. Let’s take a look at an example:

Suppose you $10,000 a year for 10 years in an investment with an average annual 8% return, your $100,000 in contributions will grow to $247,000. In a taxable account, that same investment would only grow to around $194,000 if you are within the 25% federal tax bracket. Worse, that taxable account will wither to even less if you live in a state that has a state income tax to further diminish your returns.

There are a few requirements to qualify for the full annual IRA deduction in 2015. You are required to either:

1) Not be eligible to participate in a company’s retirement plan; or

2) If you are eligible for participation in a company’s retirement plan, then you must have adjusted gross income (AG) of $61,000 or less for singles; $98,000 or less for married couples filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $183,000.

For 2015, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the year). If you are self-employed, the maximum annual addition to SEPs and Keoghs in this year is $53,000.

While you may have noticed that choosing to contribute to a Roth IRA instead of a traditional IRA won’t cut your tax bill in 2015—Roth contributions are non-deductible—it may be the best choice for you because all withdrawals from a Roth IRA can be tax-free in retirement. On the contrary, withdrawals from a traditional IRA are fully taxable in retirement. To make the full contributions, you must provide the full $5,500 ($6,500 if you are age 50 or older by December 31st, 2015) to a Roth IRA, you must earn $116,000 or less a year if you are single or $183,000 if you’re married and filing a joint return.

The amounts you could save for making contribution will vary by bracket. If you are in the 25% tax bracket, making deductible IRA contribution of $5,500, you will save $1,375 in taxes your first year. If you continue these contributions in the future, you will thousands. Of course, this is dependent on your contribution, income tax bracket, and the number of years you keep the money invested. As always, a qualified Accountant can advise you on all of the ever-changing financial matters to ensure that money stays in your wallet, not Uncle Sam’s.

Making Last-minute Estimated Tax Payments

Didn’t pay enough to the IRS during the year? You might have to face a large tax bill and significant penalties. What could have caused this? Perhaps it was the withholdings on your paycheck may be wrongly filed or you may have received a proportional gain from the stock market. The IRS’s rules are stringent: you must pay 100% of the previous year’s tax liability or 90% of this year’s taxes. If not, you will owe an underpayment penalty. If your adjusted gross income for 2014 was in excess of $150,000, you’ll have to pay 110%!

What can you do? By making an estimated payment by January 15th, you can erase any penalty for the 4th quarter, but still owe penalties for the three other quarters if you didn’t send in any estimated payments back then. However, if your income windfall did arrive on or after September 1st, 2015, you can file Form 2210,  Underpayment of Estimated Tax. This can possibly reduce any extra charges and will annualize your estimated tax liability.

Organize Your Records

While this might not seem obvious, a well-organized method of recordkeeping is invaluable to saving time and frustration that can lead to oversights, which may be costly. Keeping your financial records using a program like Quicken throughout the year is a good habit.Other suggestions for making things simpler are:

  • Printing checklist for taxes can aid you gather all the tax documents you’ll need to complete your tax return. As your business and income changes, you’ll have a template to refer to so that each year, you’ll do less and less work and be able to predict how much you’ll be owing—or being refunded!
  • Mail in January, such as W-2s, 1099s and mortgage interest statements should be kept as a rule, even if they initially don’t seem that important.
  • Collect receipts and information that you have piled up during the year, placing the documents in a folder or cabinet organized by month or category. When it comes time to file, you’ll expend much less energy and can focus on saving money. This will also make it easier for you when you have to Find a Tax Preparer, as sifting through a year’s debris can be exhausting.
David Gollner
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