Family Financial Freedom. Floyd Saunders
number of different tax credits which work just like tax payments. It would be best to review all of the current tax credits available and subtract any credits from the taxes due. Credits are attractive because they reduce your tax liability dollar for dollar.
Additional taxes - Whew it would be nice if we were done, but there might be one more tax that can increase you taxes owed, the Alternative Minimum Tax. The AMT came into being with the Tax Reform Act of 1969. Its purpose was to target a small number of high-income taxpayers who could claim so many deductions they owed little or no income tax. A growing number of middle-income taxpayers are discovering they are subject to the AMT. Fortunately the IRS has provided on its web site the AMT Assistant, an easy-to-use worksheet to see if you need to pay the additional tax. Generally this only applies if you have taken a number of the credits available, have a higher income or have used special deductions to reduce your tax liability. After all we all should be paying some taxes.
Organizing Your Taxes
Paying taxes doesn’t rank high on anyone’s list of “favorite things to do”, but the job can be made a lot easier if you plan and organize you tax records, which we will discuss next.
The easiest way to organize your records is to set up a series of files in which you place all of your monthly income and expense receipts. Try to avoid just tossing your financial information into an old shoebox. Keep a file for your major purchases, as they may be deductible. Also keep track of any unusual expenditures. Most people need files for receipts and bills in the following areas:
Expenses
1 Mortgage payments
2 Loan payments
3 utility bills
4 auto expenses and repairs
5 Insurance (Life, health, auto and homeowners)
6 Medical bills
7 Education expenses
8 Child care
9 Donations and contributions
10 Property taxes
11 IRA contributions (and/or other retirement accounts)
Income
1 Paycheck stubs
2 payments received from interest or Dividends (keep the 1099 forms at the end of the year)
3 Mutual fund statements
4 Rental property
5 Other Income
You will also want to keep files for moving expenses, business expenses, casualty losses, and anything that is included in your income or expenses.
These receipts will provide you and your tax preparer/accountant valuable information as your tax returns are being prepared. Your tax advisor may ask you a number of questions, having receipts at hand will make finding the supporting information that much easier and potentially increase your tax returns.
At the end of the year, after you have received your completed tax return from your tax advisor, gather your receipts together and place them with copies of your tax return in a new file marked “Income Tax Records for Year ____.” Keep your income tax records for at least seven years. The IRS may call for an audit on only the last three years, but depending on your tax situation there may be a tax credit or other deduction that gets carried forward from year to year and you may need to access that information.
Other Records To Keep
It’s very important to retain all of your receipts, work orders, cancelled checks and other documents related to the purchase and improvement of your home and other real estate. You will need to these records to document capital gains or losses when you sell your property. Also keep all of your records relating to investments for seven years, and the year-end statements for all IRA and retirement accounts.
Reducing Your Taxes
There is nothing wrong with reducing your taxes. Taxes can be reduced without fear of violating any tax laws or the risk of an audit, providing that you doing everything according to tax laws, and you maintain the proper records. Your taxes can be reduced by taking advantage of deductions and credits available to the tax codes. Deductions allowed by the IRS are subtracted from your adjusted gross income. Credits reduce the amount of taxes you owe. Generally a credit is better than a deduction. Consider discussing with your financial consultant or tax preparer some of the following tax-savings techniques:
Tax-free income
Tax-deferred income
Tax-sheltered income
“Bunching” deductions
Prepaying deductible taxes (Make an extra payment on property taxes for example)
Tax-advantages investments
Postpone income (taking that Christmas bonus in the next year for example)
1031 exchange for real estate sales
There are many other examples that may fit your situation. As an example, consider the difference between the yield on tax-free bonds as compared to the return on a bank savings account.
Taxes can be reduced legally and conservatively, and every taxpayer may feel comfortable in doing so. Consider this statement from U. S. Appeals Judge Learned Hand:
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.” Source: in the case of Gregory v. Helvering (1935)
Tax laws change frequently; consult with your tax advisor for the latest changes and how they may affect you.
Self-Evaluation Taxes
This self-evaluation helps you determine if your tax plan is in order and you are taking advantage of all deductions and credits available to you. Simply answer each question yes or no.
1 Are you paying the lowest possible taxes?
2 Are you using every available deduction?
3 Does your tax situation trigger the Alternative Minimum Tax (AMT)?
4 Do you understand which investments trigger the AMT?
5 Are you faced with receiving a lump sum distribution from a retirement account and need to know the best approach to invest it without paying taxes?
6 Can you defer your income from one year to the next to your advantage?
7 Would accelerating deductions benefit you?
8 should you consider refinancing your house to take advantage of a lower rate of interest?
9 should prepay your real estate taxes to increase you deductions?
10 should you consider the use of tax-advantaged exchanges of real estate to defere taxes?
These questions and many others may effect your taxes this year and in the years ahead. Find a trusted tax advisor to review your taxes each year before filing season, many times a tax preparer will do this for free in the fall months, as business is slow and they will hope you come back to them to file your taxes.
Building A Base For Family Financial Freedom
If you set out to build a house, you need a plan, a set of blueprints so you know what you want to accomplish and what steps are needed to accomplish your plan. It’s the same for