It’s tax season and consistent Mindful Tax Planning will help lower stress, prevent chaos and allow you to do more of what you love.
Three basic ways to minimize your taxes are reducing income, increase deductions, and take full advantage of tax credits. Each method might have several variations, but here are the basics.
1. REDUCE YOUR INCOME. The number one way to minimize taxes is to reduce your income. And the best way to reduce your income is to contribute money to a 401(k) or similar retirement plan at work. Your contribution reduces your wages, and lowers your tax bill. There are other ways to reduce your AGI, for example adjustments or deductions which may include Traditional IRA contributions, student loan interest paid, alimony paid, and classroom related expenses.Consult your CPA to help guide you through the process. Consult your tax advisor or CPA to help guide you through this process.
As you can see, two of the best ways to lower taxes is to save for retirement, either through a 401(k) at work or through a traditional IRA plan. Contributions to these retirement plans will lower your taxable income, and lower your taxes.
2. INCREASE YOUR TAX DEDUCTIONS. Almost everyone can take a standard deduction, and some people are able to itemize their deductions.
Itemized deductions include expenses for health care, state and local taxes, personal property taxes (such as car registration fees), mortgage interest, gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses.
One key tax planning strategy is to keep track of your itemized expenses throughout the year using a spreadsheet or personal finance program. The best strategies for reducing your taxable income is to itemize your deductions, and the three biggest deductions are mortgage interest, state taxes, and gifts to charity.
3. TAKE ADVANTAGE OF TAX CREDITS. Tax credits reduce your tax. There are tax credits for college expenses, for saving for retirement, and for adopting children.
If at all possible, avoid early withdrawals from an IRA or 401(k) retirement plan. The amount you withdraw will become part of your taxable income, and on top of that there will be additional taxes to pay on the early withdrawal.
Your tax attorney, CPA and CFP will work together to make sure you hold on to your hard earned money.
“Mindful Monday” is produced by: Charles Kochel, Wealth Advisor at Ethos Capital. The purpose of this weekly Blog/Newsletter is to communicate the principles of good investment working with markets, understanding risk and return, broadly diversifying and focusing on elements within the investor’s control- including portfolio structure, fees, taxes and discipline. Thank you to Jim Parker, with DFA Funds for his research in this article.