Tax planning effectively and immediately reduces your tax burden. It lifts a load from your shoulders and lets you enjoy more of the money you’re earning.
And there’s nothing wrong with doing everything you can to legitimately lower your taxes. Consider this famous quote from 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.”
It’s pretty much too late to do anything about reducing your tax bill for 2008. Trying to save on your taxes at tax time is like closing the barn door after the cows have run away.
But you CAN reduce your tax bill every year from now on. Today, I’m going to show you how.
Take the following tax-saving strategies with you when you visit your tax professional. Ask him to show you the difference these strategies will make in your financial health. You’re going to be meeting with him anyway, right? So go in prepared with this advice.
1. Invest in a Retirement Plan
Investing in a 401(k), SIMPLE IRA, individual IRA, or similar retirement plan gives you three benefits with one effort.
First, the money put into these plans grows tax-free. (It is taxed only when taken out.) That means a 20-year-old who puts $50 a month into a 401(k) can look forward to having $263,703 at age 65 (assuming a growth rate of just 8 percent).
Second, the contributions made to these retirement plans are tax deductible. Fifty dollars socked away every month gives you a $600 annual contribution. So, at tax time, you’ll end up with (approximately) $150 in tax savings (based on a 25 percent tax rate).
Finally, this money helps you plan for retirement. Younger people may feel it’s not necessary – but I have two words of warning: Social Security. Don’t depend on it. Take advantage of the tax law to plan your future.
2. Invest in Your Education
You’ve heard it from Michael Masterson: You can increase your income by expanding your expertise.
Take courses that maintain or improve your employment qualifications. It’s not only a good self-investment, it can help lock in job security – which is more important than ever these days. And the cost of this education and training is tax deductible.
The deduction can be taken as an optional deduction or as an Education Tax Credit. Choose the one that gives you the greatest tax benefit.
3. Invest in a Home-Based Business
Home-based business owners are able to take deductions that employees cannot – for a business phone, Internet service, office supplies, a vehicle, etc.
When you start a business, any initial losses translate into bigger tax refunds. As the business grows and makes money, legitimate deductions continue to lessen your tax burden. In his book Lower Your Taxes Big Time, tax accountant Sandy Botkin says that having a home-based business can generate $3,000 – $9,000 in tax savings.
Not sure what kind of home-based business to get into? Consider an Internet business or affiliate marketing. Both have a low cost of entry.
The idea, with a home-based business, is to build it around something you’re passionate about. That transforms it into a source of relaxation as well as financial reward.
Let’s say you love to knit. You’ve been doing it for years, and you’ve become really good at it. In that case, it shouldn’t be hard to figure out some way that you could turn some aspect of knitting into a home-based business – maybe by giving lessons, selling knitting supplies online, or marketing a video demonstrating complicated stitches. That would give you additional income, as well as tax deductions and benefits.
One Last-Minute Tax-Saving Strategy for 2008…
As I said earlier, it’s pretty much too late to reduce your 2008 tax bill. But there is one last-minute tax-lowering strategy you might be able to take advantage of.
If you work for someone and you’re not covered by a retirement plan, you have until April 15, 2009 to fund an individual IRA for 2008. You could save $1,250 ($1,500 if you’re over 50) in taxes (assuming a 25 percent tax bracket) just by taking this one action.
If you are already covered by a retirement plan, make sure you’ve contributed the maximum amount allowed. Then keep “maxing it out” every year.[Ed. Note: Internet Money Club member Tim Clay, E.A., is an Enrolled Agent – a federally authorized tax practitioner – and a certified QuickBooks Advisor with 25 years of experience. Visit www.AskTaxGuys.com to learn more and sign up for Tim’s free tax-tips newsletter.]