Please enjoy this guest post from Hanson So.
Hiding your calendar, turning back the clock, or hibernating is not going to stop the IRS from demanding you to pay your dues. By April 15th of every year, you are required to file your tax returns.
You cannot avoid paying taxes; however, there are many steps that will help you lower your tax bill. Careful planning and implementing the right tactics will lower your tax bill and leave you with more money in your pocket. Here are some key areas to focus on:
- Reduce taxable income
- Avoid Fines and Penalties
- Deal with IRS Debt Wisely
Tax issues are complicated. Make sure that you plan your tax issues together with a CPA or a certified tax advisor.
Reduce Your Taxable Income
Why pay more taxes than necessary? The two easiest ways to save on your tax bill is to make sure that you are utilizing all available income adjustments (reduces your total taxable income), tax deductions, and tax credits.
Here are a few ways that you can reduce your tax bill:
Utilize your income adjustments and tax credits: There are a number of income adjustments and tax credits that can help you save on taxes. Self-employed must keep accurate records of their business expenses. The IRS requires that business expenses be necessary and ordinary. Some common expenses are a car, rent, advertising, or even home expenses (if you work from home). Other income adjustments include student loan interest, tuition and fees, moving expenses, bad debt deduction, and alimony. Some common tax credits are Earned Income Tax Credit, Education Credits, Child and Dependent Care Credit, Adoption Credit, and Saver’s Credit. If you are more adventurous, then check out solar energy and the Federal solar energy tax credit.
Maximize your retirement account deposits: One of the most common ways to reduce your tax bill is the retirement account deduction. There are a number of different accounts, including 401k, IRA traditional, and IRA Roth accounts. The one that best fits you depends on your employment situation, amount of income, and age. It is always best to speak with your HR department and/or a certified tax planner. If you want to save tax money, then maximize your personal contribution and employers matching contribution. For 2015, the IRS allows for a maximum personal contribution of $18,000.
Utilize your full deduction: All taxpayers are offered a choice between a standard deduction and an itemized deduction. The standard deduction for single taxpayers for 2014 was $6,200. However, if you have certain expenses, it might be worth your while to use an itemized deduction. Here are some of the common items: mortgage interest, medical expenses, casualty and theft losses, and charitable gifts. Make sure that you keep good records of all your expenses.
Avoid Fines and Penalties on your Taxes
Filing taxes are a hassle. The whole process of collecting documents, filling out complicated forms and trying to understand numerous complicated laws and regulations is a big headache. Most of us don’t need too many excuses to procrastinate.
However, if you don’t file your tax returns on time and pay taxes that are due, then you are liable to pay unnecessary penalties and interest. One free filing option is the IRS Free File. However, if you have any special issues then consult with a Certified Public Accountant or tax specialist.
Equally important as filing, is making sure that you make your payments on time. A delay in payments will also carry penalties and interest. The IRS has numerous options to make payments, including a mailed check, debit card, online Direct Pay, Same Day payment, and an account to set up automatic Electronic Funds Withdrawal.
Deal with IRS Debt Wisely
According to past IRS research, US taxpayers owe billions of dollars in taxes not paid on time. Taxes not paid on time can be a result of under-reporting, non-filing, and underpayment. Under-reporting was by far the largest reason.
For anyone deep in debt, it is tempting to lower their withholding tax rate, skip an estimated tax payment, or fail to file and pay taxes. However, failure to pay your tax bill can have very serious consequences, beyond the penalties and interest. Not paying your tax bill will not save you money. A tactic can be very costly.
One thing that you want to avoid is an IRS tax lien. The IRS can issue an administrative order placing a wage garnishment (IRS wage levy) leaving you with very little to live on. The federal statute that limits wage garnishments to 25% of your income does not bind the IRS. The 2014 limits can leave a single filer with no dependents with a monthly take-home pay of $858.23. If paid on a weekly basis that would only be $198.08.
Fortunately, there are ways to deal with IRS tax debt that will both get you debt free and save you money. Here are a few tactics:
- Installment agreement: The IRS allows taxpayers to pay off your debt in a monthly payment plan. An installment agreement does not eliminate debt but can save on penalties, interests and administrative fees for setting up the agreement.
- Partial Payment Installment Agreement: This program allows taxpayers to pay over a longer period of time and at a reduced rate. This program requires an updated financial review. In addition, the IRS can require the taxpayer to use equity from certain assets to lower the debt.
- Offer in Compromise: For people with hardships, the IRS offers a program called Offer in Compromise (OIC). The OIC allows a taxpayer to pay-off the IRS debt at a reduced rate. The payments can be a lump sum or a short-term payment plan.
Tax issues are complicated. Whenever in doubt, seek out reliable professional tax advice. However, many of us share common experiences.