There are a bunch of tax changes being awaited this January and it calls for some steps to be taken to save money from the tax man. With Congress having declared to make the tax changes it is expected that estate taxes will shrink and tens of tax breaks will come to an end. It is very likely that this year, each American’s per capita spend will be higher than the last year and this increase is expected to be close to $3500. Therefore, it is essential to give ample thought to reduce the tax bill:
1. Feed the 401k: The best way to save tax money is by siphoning off money into an employer based retirement plan or the standard 401k plan. The money which is contributed towards the saving plan can help reduce taxable income therefore reducing your tax bill.
2. Try to safeguard the refund: When filing for the tax return the tax amount withheld from the paycheck or submitted through the estimated tax payment must match up ideally. However, this hardly ever happens. Researches show that 75% of US tax payers are hooked to tax refunds. Isn’t it a better deal to obtain your refund as and when you want it and not wait until year end? Again, the other risk involved with refunds are identity thefts and stealing of the refund.
3. Penalty-proof the refund: In case you expect that you will owe money when you will file for the taxes, avoid an underpayment penalty by simply boosting the withholdings. You can definitely evade penalties by paying 90% of what you owe. You can also be sure to evade penalty by making 100% pre-payments against your last year’s tax liability.
4. Plan the itemized deductions well: It is best to postpone the charitable gifts for some time. However, this is also dependent on your personal situation. It becomes all the more important to look out for deductions if you’re expecting your income to drop or if you have retirement plans. If Congress fails to act, the high-income group tax payers can lose upto 80% of the itemized deductions. It is also a good idea to pay for expenses in 2013 like your January mortgage, state income tax and other real estate taxes.
5. Change the IRA to Roth: In present situation it is very important to convert the IRA to Roth. If you are to withdraw from IRA, it is taxable at ordinary income tax rate while if the withdrawal is from Roth, it is penalty-free as well as tax-free if you are 59 years and 6 months old and also if your converted account is 5 years old. Also, you are required to pay tax of any contributions or pre-tax earnings applicable to IRA for the year you convert it to Roth. If you’re afraid that you might be paying higher tax rates if the IRA lowers its rate of tax, you can always convert back to IRA.
These six tips that we have just talked about will help save a lot of money which would otherwise be spent in paying taxes without too much hassle. Also, it is always helpful to seek professional tax expert advice who can help you understand where and how you can save money on tax.
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