Tips For Lowering Your Taxes


Many individuals despite earning not much end up paying lots of taxes and the same is the case with small businesses. But effective planning of your financial resources and careful preparation of taxes can greatly lower the tax bill at the end of the years. We will discuss some tax tips which can do that.

One should start planning about filing taxes from the month of December itself. Keeping that in mind, if you are planning to buy any mutual funds or stocks between now and the year end will not be a great idea. Because if the stocks or funds perform well and they pay out their dividends before the end of the year which most companies do, the IRS sees only that part if you roll the dividends into buying new shares and you have never seen the money.

This year the IRS has introduces telephone excise refund, which means you are entitled to get a minimum of $30 and a maximum of $60 for individuals with a family of four or more. And for businesses, the refund is 2 percent of phone expenses for small businesses (those with 250 or fewer employees) and one percent for large businesses (those with more than 250 employees).

Another way of lowering the taxes is by increasing deductions and one way to do is invest more money in retirement saving plans like IRAs, 401 (k) etc. The limit for retirement savings like 401 (k) has been increased to 15,000 this year and it is 20,000 if you are over 50. Similarly you can contribute up to $5,000 now if you are over 50 and it is still $4,000 for those under 50 years of age. So make sure to utilize these benefits before the end of the year.

Try not to get into the trap of Alternative Minimum Tax (AMT); it is a shadow tax system where in people pay estimated income tax quarterly. Some people prepay their real estate tax which is due in January next year now to increase the deductions in this year’s returns. The rule is you have to calculate the taxes both under regular code and AMT and pay whichever is higher. While this scheme was started to catch the rich tax payers from paying zero taxes it has been increasingly affecting the middle class people now. The AMT does not allow deduction for state and local taxes, home-equity loan interest, investment expenses and personal expenses for yourself and your dependants.

It is a smart idea to donate to charities in the year end if you plan to do it next year. Also donating stocks or mutual funds to the charities are a better option compared to cash contributions. In this way you can save yourself from capital gains tax.

You get a tax deduction for being energy efficient like buying a hybrid car will earn you a direct tax credit or insulating your home will enable you to deduct up to 10% of your cost. But the limit is $200 for your windows.

The businesses can lower their taxes by deducting many business related expenses. You can include things like training, advertising costs, interest on loans, employee transportation cost and many more. The best person to help in this regard will be your account who can look into hidden deductions and maximize your returns.

Also if you are thinking of starting a retirement plan for your employees do it before the end of the year. The IRS allows sole proprietors to allocate 20% of their annual income into retirement plans. It is 25% for corporations.

A smart way of doing business is to pay your overhead bills like utilities, rent and insurance premiums before the end of the year to maximize the deductions. You can also pay pending bonuses to the employees before Dec. 31 to get the deduction in the current year.

One of the many smart ways of running a small business is to hire your family members. By distributing the income you can increase the amount that can be taxed at lower tax brackets. But again be sure to do it the right way, consult a good accountant and also make sure that you don’t underpay your family members.

Hiring independent contractors instead of your company employees reduces the payroll taxes.

Buying those items now that your business may require in near future will also maximize your deductions this year. It might not be a bad idea if you consider stocking up your supplies or equipments or any other office related items now if your company cash flow permits you to do that.

One of the greatest ways to save tax is to defer your income, any payments that your small business can receive in January instead of December reduces your tax bill up to a certain extent. Good thing to know is that the income that is deferred to January, 2007 will not be taxable until April, 2007.