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Have you ever had the 'tax time jitters?' That’s when you wait anxiously for the tax preparer to give you the good news of a nice, fat refund or the bad news of…well, you know what the bad new is. You can help yourself through this tedious season by a little judicious planning at the beginning of the year to minimize the taxes you might be due.
You know the old saying, "A little knowledge goes a long way." Learning to assess your tax situation early on can head off trouble with the IRS down the road. But, like most things that are worthwhile, it all begins with a decision by you. Here are some basic tips to get you started:
- Fill out your W-4 accurately. The W-4 is the tax form an employer gives you when you're hired. The purpose of the form is to determine the number of your tax exemptions (dependents are examples of exemptions) and, thus, the amount of money that's withheld from your paycheck toward taxes. You can, by law, claim the maximum amount of exemptions due to you. You may claim one exemption for yourself and one for each of your dependents. But, you can change that number on your W-4 as many times during the year as you need to. Many people claim fewer exemptions during the year than they're entitled to, thereby prompting more money to be withheld, and so ensuring a refund from the IRS.
- If at all possible, itemize. When computing your taxes you have two choices: you can take the standard deduction, or you can itemize deductions. If you have enough deductions to subtract more money than the standard deduction would, you should itemize. However, itemization is not necessarily an easy process. You must carefully read and understand the stipulations for each category to determine if you meet the requirements. That said; there are many, many things that can be deducted. For example, uniforms that you buy for work, mileage you drive for doctor visits and medical treatments, mortgage interest and charitable contributions are just a few of the expenses you may be able to write off.
- Use credits whenever possible. It's a fact that credits are more valuable than deductions. A deduction will reduce your taxable income. A credit, on the other hand, will reduce the amount of taxes that you owe. Here's a (very) simplified example to show the difference: let's say you owe the government $5,000 on the $50,000 you earned during the year. Charitable contributions during the year net you a deduction of $2,000. Now your taxable income is $48,000, so you owe the government $4,800. Using the same example, you received a tax credit of $4,000. That previous $5,000 tax bill is now educed to $1,000. Tax credits have a 'dollar-for-dollar' value. Which would you prefer? We thought so.
- Contribute to your employer's retirement plan. Money that's placed in a retirement plan is generally tax-deferred. In other words, taxes are paid on the money only when it is withdrawn after retirement. Before-tax contributions reduce the amount of your gross taxable income. So, contribute as much as you can to reduce your tax bill and build up your retirement savings.
