Micro-managing every little detail as you prepare for your income-tax filing may not be your idea of a good time. In fact, just thinking about filing taxes is enough to cause stress to many of us. But if you honor the three tips to help reduce your taxes that we introduced to our clients, Christel and Tony, we believe you may experience the desired result of keeping more money in your pocket; and, there is a good chance that your stress will diminish, too.
Tip #1: Maximize your tax-deferred savings.
- If you are a business owner like Christel, consider implementing a company retirement plan such as a 401(k), in tandem with a profit sharing plan. Such plans permit tax deductions now, and you have the added benefit of investing to build your retirement savings.
- Tony, on the other hand, is a consultant without employees. To reduce his taxes, we implemented annual contributions to his SEP IRA plan. This is structured to permit him—depending on his annual earnings—to reduce his taxes and, just like Christel, save for retirement.
Tip #2: Donate appreciated securities to charities rather than cash.
- Christel and Tony enjoy contributing to a number of charities each year. Switching from a donation of cash to that of donating highly appreciated securities increased their tax deduction.
- The donation of highly appreciated securities also saved them from paying hefty capital gains taxes on the securities they would need to sell that year, for diversification and risk management purposes.
Before we segue into Tip #3, it is important to note that retirement plan contributions as well as other potential tax-deductible benefits, such as charitable contributions, are subject to numerous and changing rules and regulations that must be honored—because the IRS does pay attention and penalties can be confiscatory. A conversation with your CPA (Certified Public Accountant) is vital before you take action.
Tip #3: Adopt a system to stay organized.
- Christel introduced Tony to the benefits of using an electronic tool such as Quicken, QuickBooks, or mint.com to organize their data and financial records.
- They decided that a monthly update and review of their data and details, organized by category, would ensure they did not overlook anything pertinent.
- What a stress reliever to know that their organizational system prepared them to take advantage of every possible option to reduce their taxes. Christel and Tony had their documents and data all ready, at the click of a mouse!
Determining just what you need to organize regarding your financial affairs can be a daunting task, despite the desire to keep more of what you earn. Download our Personal Affairs Inventory to guide your efforts and make your organizing easy. Better yet, delegate the tax-reduction planning to us and use your discretionary time for something you love instead. Contact Entrust today: firstname.lastname@example.org or 610-687-3515.