Your mid-year checkup: Get savvy about lowering your taxes
Are you still owing the IRS in taxes every year?
Not a great situation to be in, is it? But there is still hope
for this year. You have almost six months, in some cases a
little longer, to make certain you owe less tax, and possibly no
tax, next year.
Here’s a blueprint that outlines the keys to lowering your taxes
and remaining audit proof. Follow these keys and you’re
guaranteed to lower your taxes by hundreds, if not thousands, of
dollars!
Key #1: Consider a Home Office Deduction
Many taxpayers have avoided the home office deduction because it
has been regarded as a red flag for an audit. If you
legitimately qualify for the deduction, however, there should be
no problem. You are entitled to write off expenses - such as
rent, utilities, insurance, and housekeeping - associated with
the portion of your home where you exclusively conduct business.
A middle-class taxpayer who uses a home office and pays $1,200 a
month for a two-bedroom apartment could easily save $1,200 in
taxes a year. People in higher tax brackets with greater
expenses can save even more
Key #2: Organize your Records
Good organization may not cut your taxes. But there are other
rewards, and some of them are financial. For many, the biggest
hassle at tax time is getting all of the documentation together.
How do you get started?
Collect receipts and information that you have piled up thus
far. Group similar documents together; putting them in
different file folders if there are enough papers. If you have
time, enter the amounts from all these documents into a computer
program like Quicken or Microsoft Excel for quick totals and
make a printout for your tax preparer.
You can expect savings of $300 to $400 with your tax preparer
and hours of your time. Plus, you’re likely to sail through an
audit - with fewer assessments and penalties - if you have
documentation on hand.
Key #3: Contribute to Retirement Accounts
If you haven’t already funded your retirement account, do so by
April 15, 2005. Making a deductible contribution will help you
lower your tax bill. Plus, your contributions will compound
tax-deferred. Your savings will vary. If you are in the 25% tax
bracket and make a deductible IRA contribution of $3,000, you
will save $750 in taxes the first year. Over time you will save
thousands, depending on your contribution, income tax bracket,
and number of years you keep the money invested
Key #4: Find a Tax Advisor
Did this year’s tax season feel like a never-ending nightmare of
tax forms and a huge tax bill? Then now is the time to take
another look at 2003 and plan for the current tax year. First
look back at the process you went through in compiling your
returns. Do you have a huge tax bill or tax refund? Was your tax
preparation software helpful? Did your professional tax preparer
meet your needs?. Any good preparer should save you at least as
much as the fee they charge. You may also gain valuable advice
on how reduce your taxes for the coming year. But don’t wait
until the last minute.
Ask friends and family for recommendations. Ask about
credentials and professional designations. There are two
designations to look for in a tax preparer. Enrolled agents
(EAs) have passed rigorous IRS exams and are certified to
represent clients in tax court. CPAs, or certified public
accountants, have also passed several examinations and are
licensed to practice by the state.
Interview your top candidates to see if you feel comfortable
with them. Do they have the expertise for your specific
situation? And will they be available for questions after tax
season is over. When you first meet to talk about your taxes, be
prepared to talk about your personal life. Your preparer isn’t
just being nosy. Personal details can have important tax
implications. Are you planning to get married or divorced? Are
you looking to buy a house? Such life events show up on your tax
return as dollars and cents.
Savvy overseeing of your financial books will enable you to
build a life and/or company that thrives. And it’s literacy that
enables you to do that.