Everyone is – or at least should be – aware of the deadline to pay our taxes, but you may not be aware that there are some long-term benefits of an overall analysis of your financial situation throughout the year in order to receive the maximum tax breaks. This is known as Tax Planning, and it can ultimately shrink your tax bill, but first, here are some things you need to know, and that a tax professional can help you with:
- Understand Your Tax Bracket – The United States has a progressive tax system. That means people with higher taxable incomes are subject to higher tax rates. People with lower taxable incomes are subject to lower tax rates.
- The Difference Between Tax Deductions and Tax Credits – Tax deductions are specific expenses you’ve incurred that you can subtract from your taxable income. They reduce how much of your income is subject to taxes. Tax credits give you a dollar-for-dollar reduction in your tax bill.
- What Kind of Deductions to Make – Deciding whether to itemize or take the standard deduction is a big part of tax planning, because the choice can make a huge difference in your tax bill.
- Knowing What Tax Records to Keep (And for How Long?) – Keeping tax returns and the documents you used to complete them is critical if you’re ever audited. Typically, it’s advised that you keep them for a period of 6 or 7 years, but it may vary depending on circumstances. A tax professional or tax preparer can help in this area.
- Move Your Money – A tax professional can advise you on a number of strategies to protect your assets from IRAs to 401ks and Flexible Spending Accounts – as well as Health Savings Accounts.