We all dread them, but as Benjamin Franklin quipped, “There’s nothing certain in this world but death and taxes.”
Since no one wants to avoid taxes the hard way, it’s better to plan ahead and tackle them early. Otherwise, the penalties, interest, and other fees you’ll have could turn a molehill of taxes into a mountain.
You might even find that dealing with your taxes each year becomes easier once you’re informed. The trick is to find the little tweaks that most people don’t know about and use them to your advantage.
Not sure where to start? This short guide will show you how to use these three tips to get yourself ready for next year’s taxes now.
1. Know Your Numbers
When anyone starts a new job as a taxed employee, they have to fill out a W-4 form. Called an “Employee’s Withholding Certificate,” this form tells your employer your filing status and which category of deductions to take out of your paycheck.
In general, the more deductions you have, the lower the tax amount that’s taken out of your check. However, we tend to choose a number when we’re first hired and never change it, even if our circumstances differ.
You might have needed to file “4,” for example, when you first started working. Since then, your children went off to college, and you’re better off financially than you were.
In that case, if you tend to have a large amount owed in taxes each year, consider changing your filing status to zero. Your regular paycheck will be a little bit lower. Yet, dealing with that slight pay cut can significantly reduce the annual tax hit when you file.
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2. Put Your Money into an Insurance Policy
Income used to pay life insurance premiums isn’t taxable. Over the years, many of these policies gain what’s called “cash value.” This means that if you were to cancel the policy, you could still receive part of your investment back.
Even more attractive is the fact that that cash value can be tapped into if you need money in a hurry. Instead of getting a loan and paying interest and taxes on it, your policy pays you part of the accumulated earnings you’ve accrued.
Infinite banking is an example of this type of insurance. Your cash value increases faster if you pay more than your monthly premium toward your permanent life insurance policy. The cash value is tax-deferred, so until you cash out your earnings, you don’t pay taxes on them.
Instead of keeping your extra cash in a savings account, where it will barely grow, an infinite banking account is a smart way to store your funds. It makes planning for next year’s taxes easier. Your taxable income will be lower, and therefore, so will your amount due.
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3. Plan Your Major Investments Carefully
Are you planning to sell your house this year? Will you be cashing out stocks or other investments?
Before you get too tempted by the money you’ll be getting, think about the taxes you’ll be paying on it. If you can be patient and strategic, you can save serious taxes.
Your home’s value could have skyrocketed since you moved in last year. However, if you sell it before you’ve owned it for two years as your permanent residence, it’s possible to get an exclusion on the gains you made. Waiting patiently for a little while before selling would be the smartest financial move.
Check with your financial advisor about the penalties that you could incur if you pull out assets like stocks. Their value is higher, but holding onto them longer could reduce your capital gain tax rate.
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In some ways, the IRS relies on people to be ignorant of the tax rules. That way, they’ll sell assets without realizing the massive percentage owed on the money they receive that could have been avoided.
By planning ahead for next year’s taxes today, you have time to be strategic about where your money goes. Invest your excess income into deferred tax policies. Sell or receive assets when they get you lower tax rates. And change your deductions to minimize the impact on your bank account.
These three simple tips let you keep your money in your pocket instead of paying it to the IRS.