Useful Tips To Help You Manage Your Taxes The Right Way

Although the Tax Cuts and Jobs Act has been in effect for four tax seasons now, many taxpayers are still trying to get familiar with all the changes. When you look at the changes that occurred though, it’s understandable how taxpayers can be overwhelmed. State and local tax deductions were capped at $10,000, the standard deduction was doubled, tax exemptions were also doubled, new limits were placed on home equity debt tax deductibility, and the tax brackets were changed.

These are a lot of changes, right? If you’re unsure as to where to start, here are some useful tips to help you manage your taxes the right way. 

Understand Your Tax Bracket

First of all, you’ll need to determine the federal tax bracket you fall into in order to figure out your taxes. Since the US has a progressive tax system, your taxable income determines the tax rate you’ll be subjected to. That means that the higher your income is, the higher the taxes you’re likely to pay. However, you probably won’t pay the entire rate of the tax bracket you fall into, since you have the opportunity to subtract tax deductions after dividing your taxable income into chunks. You’ll then calculate the tax on each part accordingly. Although it may sound confusing at first, you’ll quickly get the hang of it and be able to file your taxes accurately. 

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Organize Your Documents

In order to determine your tax bracket, you’ll first have to do some paperwork. This is the time to gather your financial records and tax documents. While you’re at it, be sure to use the tax return of the previous year as a starting guideline to help you with the process. Doing so will greatly help you in determining your previous income and understanding how the deductions and credits were reported accordingly. If you don’t have the tax return report at hand, you can request a copy from the IRS or just contact the tax software provider you used last year. The documents and reports you receive will help you know which documents you’ll need to prepare for this year’s tax filing. 

Decide if You Need an Expert’s Help

If you feel too overwhelmed, it’s worthwhile to consider getting an expert’s help. This is especially useful in case that your financial situation has changed greatly over the past year, as in the case of getting a divorce, starting a business, switching to self-employment, or claiming unemployment benefits. In this case, hiring a certified public accountant (CPA) or a tax professional will help you in accurately filing your taxes. However, keep in mind that you’ll need to move quickly to get an expert’s help at a good rate. The closer you get to the tax filing season, the busier they get and the higher their rates will be. 

Make Use of Available Tax Deductions

Chances are, you can take great advantage of tax deductions if you play it right. There are many available tax deductions that you can use, such as contributing to charity, especially if you use appreciated stocks that you’ve owned for more than one year. The same goes for the home office deductions that are available to you if you’re running a small business from your home. However, you’ll need to make good business use of a home worksheet to keep an accurate record of your finances. That’s a requirement for claiming your available home office tax deduction, using an excel worksheet will greatly simplify the process and calculations. 

Consider Deferring Your Income

Just like you can accelerate claiming the deductions, you can choose to defer paying the taxes by deferring the income altogether. Although you may find it difficult to defer your salary, you can do so with your end-year bonuses without affecting your financial situation. Instead of claiming the bonus this year, you can request it to be billed for the next year instead. By doing so, you’ll be able to reduce the amount of taxes you pay by lowering your net taxable income for the year. Obviously, you need to think of the next year as well, since these bonuses will be added to the next year’s taxable income. If you think deferring your income will put you in a higher tax bracket next year, it’s better to accelerate the income to stay in your current tax bracket. That’s definitely better than being billed a higher tax return the next year. 

Get Rid of Your Losing Investments

“Loss harvesting” is a well-known strategy that involves selling some of your investments to offset the losses. Once you sell losing mutual funds and stocks, you can use the money to offset the taxable gains you’ve earned throughout the year dollar for dollar. In fact, you’ll benefit even more if your losses are greater than the gains, as you can use up to $3000 to render other income nontaxable. If your losses for the year had exceeded $3000, you can carry it over to the next year and repeat the process with next year’s income. Basically, you can live the rest of your life carrying over excess losses to wipe off the income and gains of the next year. 

Consider Converting to a Roth IRA

Instead of being forced to withdraw an income from a traditional IRA or take RMDs once you pass 72 years of age, you can convert your investment account into a Roth IRA. That way, your withdrawal will not be subjected to state or federal taxes and you’ll be able to leave the funds to earn interest for as long as you like. Keep in mind that this is best done in a low-income year, as converting to a Roth IRA will place you in a higher tax bracket.

If you’re among those who are still getting familiar with all the new tax rules, you should start planning your taxes right away instead of waiting till April 15 to file right before the deadline. Since the start date for the 2022 tax season is yet to be determined, it’s worthwhile to start managing your taxes and preparing the documents before the end of the year. Hopefully, these few tips can help you simplify the process of managing your taxes in a better way.