Planning your tax year and arranging your finances may not sound like the most interesting thing you’ll do this year, but we are certain it will be much more interesting if by doing so you discover that you have less tax to pay.
In an ideal world, every year you will have managed your financial affairs so that your taxes are minimized as much as possible.
We realize that this can be incredibly difficult to do. It’s already February, so before you know it April will be upon us and there will be no more tax planning to do.
If you can spare even an hour or two, we would encourage you to talk with us now about arranging your finances so that your taxes are not the great burden that they are to many.
Here are a few ways you can do this:
Reduce your income
Don’t worry – we don’t mean that you simply stop taking in more customers or more work for your family business! That wouldn’t make sense for anyone. But the number that is called your “Adjusted Gross Income” (AGI) is a very important one for how much tax you have to pay – so the lower this number is, the less tax you have to pay.
There are many things that depend on your AGI, or changes to it. You’ll want to consider things such as your tax rate and tax credits.
- Contribute money to a 401(k) or similar retirement plan. What you contribute there will reduce your AGI.
- Deductions and adjustments: These reduce your AGI, and can include things like contributions to a traditional IRA, student loan interest, alimony, and classroom related expenses.
Increase Your Tax Deductions
After you’ve reduced your AGI, you then reduce that number by deductions to arrive at your taxable income.
This is again another opportunity to reduce the number on which you will be taxed.
First, you have your standard deduction. Almost everyone can use this. Your standard deduction and personal exemptions depend on your filing status and how many dependents you have.
You may also be able to itemize your deductions, including expenses for:
- Health care
- State taxes
- Local taxes
- Personal property taxes
- Mortgage interest
- Charitable gifts and donations
- Expenses related to your job or work
- Tax preparation fees
- Investment expenses
We would strongly recommend that you use the Xero online accounting software to track these expenses during the year. If you’re not using it now, talk to us. This makes coming up with itemized deductions once a year very, very easy.
Review Tax Credits Available To You
We started with AGI. Then we reduced this down to taxable income. Now we can look at tax credits, which are actually a deduction from the tax you have to pay. These are very powerful.
Tax credits can relate to:
- College expenses & higher education :
- American Opportunity tax credit
- Lifetime Learning
- Saving for retirement (Savers Tax Credit)
- Child & dependent care
- Earned Income tax credit
When you have a small business, there can be many mitigating factors to these elements we’ve discussed. Please do talk to us about how this all relates to you and your business.
