No one has ever been a big fan of Tax Day.
It’s one of life’s certainties next to death.
And while many of us may choose death over taxes in some years, there’s no way around it. Unless, of course, you enjoy dealing with such friendly IRS people.
No. 1 – Have a competent accountant
A friend of mine once borrowed against her 401(k) to pay bills. She forgot to include it in her tax calculations one year. Big mistake. After some hefty accountant fees, “friendly” letters from the IRS, and headaches, it was resolved. It didn’t need to happen, though. It’s why a competent accountant is a smart idea.
No. 2 – You must report all income
One of the easiest ways to get visited by your friendly neighborhood IRS agent is to hide income, thinking the government won’t find out. It’s not like they’ll single you out.
Don’t try it. It won’t end well.
You should receive a 1099 from each person that pays you. These are also filed with the government and must match what they see. Or you risk an audit. Fun stuff.
No. 3 – Understand your tax credits
Unlike deductions, tax credits can reduce your liability dollar for dollar. A $1,000 child tax care credit for example is deducted from your tax bill in full, dollar for dollar. There are tax credits for parents, including the child tax care credits. Students should still be able to claim credits for the American Opportunity Tax Credit and the Lifetime Learning Credit, as well as student loan interest deductions.
No. 4 – Contribute to your Retirement Accounts
It’s always important to use retirement accounts, allowing folks to take advantage of breaks. Contributions to a traditional IRA or 401(k) – for example – can reduce taxable income and allow for tax-deferred growth (pay when the money is taken out). A Roth IRA “doesn’t allow to deductible contributions but offers tax-free growth, meaning you owe no tax when you make withdrawals in retirement,” according to CNN Money.
No. 5 – Don’t overpay on capital gains taxes
Over the last several years, the stock market has exploded in value, rewarding short-term and long-term investors. But it’s the government that’ll come out as one of the big winners from those pesky capital gains taxes we’ll all have to pay out.
Profits from investing in stock can be taxed with capital gains taxes and dividend income tax.
A capital gain tax happens when you sell a stock for profit. This is calculated by finding the difference between your cost basis — or the original value of the stock – and your sales price.
If you bought a stock at $2 and it ran to $10, the capital gain tax applies to the $8 profit.
If the difference between cost basis and sales price falls into the red, you lost money.
Take the easy way out – have your accountant worry about all of this.
It’s why they get paid the big bucks.