Paying taxes can be a hard pill to swallow for many taxpayers, especially if their tax bill is high. Your business has had a great year, you have increased your profits, and whether you’ve noticed it or not, you’ve simultaneously increased your tax bill. It’s only natural that the IRS is going to want a bigger piece of the pie the more you make. So what can you do to offset your tax liability? The answer is tax planning. You know you are going to have to pay taxes on your income, it’s inevitable, so why not plan for it ahead of time? By strategizing throughout the year, you not only prepare yourself mentally, physically, and financially, but you can save a lot of money on your taxes. Here is how tax planning can save you thousands.
The Basics Of Tax Planning
The goal of tax planning is to save money on your taxes. Some basic aspects include: lowering your AGI (adjusted gross income), leveraging tax deductions, and taking advantage of tax credits. In addition, tax planning may also include setting aside a portion of your income for tax payments, making estimated tax payments, timing large purchases for tax advantages, and timing income. A tax advisor is a valuable asset when it comes to tax planning, not only can they help you save money on your taxes, but they can also help you form a financial game plan that helps you grow your business and reach your financial goals.
Strategies That Work
Wondering what tax planning strategies actually work? Here is now tax planning can save your thousands:
Lower Your AGI
If you are employed you can contribute to your 401(K). These contributions can be taken before taxes, which lowers your AGI. You can also lower your AGI through adjustments. Adjustments are considered above the line deductions, meaning they don’t have to be itemized on a schedule A, but instead can be subtracted on page 1 of your 1040. Above the line deductions include:
- Contributing to a traditional IRA (maximum annual contribution limit is $6,000),
- Contributing to a self employed pension plan like a SEP or SEP IRA.
- Self employed health insurance plan.
- Health savings account contributions.
- Self employed taxes (these consist of both social security and medicare contributions)
- Education expenses like tuition and fees can reduce your income as much as $4,000, in addition, student loan interest deductions are also an above-the-line writeoff of up to $2,500.
After adjustments to your income, you are left with your taxable income. You can further lower your taxable income by leveraging deductions. Deductions are expenses that are deemed ordinary and necessary to your business. Some examples of deductions include:
- Marketing expenses
- Travel expenses
- The cost associated the attending a trade show or conference
- Operating costs – this could include utilities, phone expenses, internet
- Shipping costs – packaging and postage
- Mileage expenses – be sure to use a good mileage tracker
- Maintenance costs
- Technology purchases
Keep in mind that these are Schedule C or Schedule E deductions and not itemized deductions. There is a difference between itemized deductions on Schedule A and deductions directly related to your rental activity.
Also keep in mind that when it comes to standard versus itemized deductions, the standard deduction recently jumped to $12,000 for individuals, $24,000 for married couples filing jointly, and $18,000 for those filing as head of household. Of course, you want to file in the most advantageous way, so check and make sure your deductions equal more than your standard deduction, or it might make more sense to take the standard deduction. Talk to your tax advisor about what makes the most sense for your tax scenario.
Take Advantage of Tax Credits
Tax credits are similar to deductions in that they lower your tax bill, but instead of lowering your taxable income, they lower the actual amount you owe in taxes. Some examples of tax credits that can lower your tax obligation include:
- Child Tax Credit – provides a tax credit of up to $2,000 per child
- Lifetime Learning Tax Credit – if you take a college course you could qualify, the course doesn’t have to apply to your industry either.
- Business Energy Tax Credit- is an incentive for making energy-efficient improvements to your business operations. This could be investing in more efficient equipment or employing the use of more efficient energy sources like solar power.
- Research and Development Credit – was designed to help offset some of the costs associated with the development and testing of new technologies or procedures.
- Plug-In Electric Vehicle Tax Credit – this credit varies from $2,500 to $7,500 depending on the battery capacity of the vehicle. This credit phases out at manufacturers a certain threshold of models sold.
Tax planning is the best way to save money on your taxes and stay organized. We recommend having an organized accounting process set up to manage all expenses and income throughout the year, and meeting with your tax advisor at regular intervals to make sure you are on track. To learn more about how tax planning can save you thousands subscribe to our newsletter.