Tax Saving Advice & Tips
- Tax advantaged retirement accounts like 401k plans and traditional investment retirement accounts (IRAs) can save money on taxes while helping you save for the future. When you put money into a 401k plan or IRA, the money you commit is not taxed and does not count toward your taxable income. In other words, if your tax rate is 25 percent, you save 25 cents in taxes for every dollar you save in an account that allows for pretax contributions. Employers sometimes offer matching contributions for 401k plans; at minimum, try to contribute the maximum match offered by your employer.
- It is essential that you file a tax return each year by the appropriate due date. The normal due date for taxes is April 15 of the year that follows a particular tax year. If you fail to pay the full amount of tax you owe by this date, you may owe late payment penalties and interest on money you don't pay. Always pay your full tax liability by April 15 if you can, and file a tax return by the due date even if you can't pay your full tax liability.
- Tax deductions are expenses that you can subtract from your adjusted gross income when figuring your tax liability. When you file a tax return, you can choose to accept a standard tax deduction or deduct itemized expenses. According to TurboTax, the standard deduction is $5,700 for singles in 2010 and $11,400 for married couples filing joint tax returns. Keep records of all the expenses you have during the year that qualify as itemized deductions, such as mortgage interest, real estate taxes and charitable contributions. If the total of your itemized deductions is greater than your standard deduction, you will save money by choosing to use your itemized deductions.
- Capital gains tax is imposed on profits you make from investments. For instance, if you buy mutual funds and sell them at a profit several years later, you will owe capital gains tax on the sale. The government charges higher capital gains taxes on short-term investments than long-term investments. Hold your investments for a least a year before selling them to avoid being subject to the short-term capital gains tax rate.
