Personal Financial Planning Basics: 3 Tax Preparation Tips

September 3rd, 2013 by Bryan Brown

Everyone wants to find ways to minimize the taxes they have to pay at the end of the year. In order to better your chances for saving money, it is important for you and your CPA to start planning as soon as possible. Many industry experts agree that on average it takes six months to properly plan the tax season, including learning about the best available opportunities for the year and then implementing your plan. Even though tax season feels as though it is a long way away, if you speak to your accountant early you may have a better chance of saving money on your taxes. There are a few tricks your accountant can help you with, but many of them need to be enacted as early as possible.

Reduce Your Annual Income

This method of reducing your taxes isn’t as scary as it sounds. As you can probably guess, the more money you make, the more taxes you will have to pay. Inversely, the less money you make, the less you will owe in taxes. Keeping this principle in mind, the most important element in determining how much you owe the government is your Adjusted Gross Income. To find this number, you take your total income for the year and subtract out any adjustments you’ve made to your income. The difference that you’re left with is your Adjusted Gross Income (AGI). One of the simplest ways to make adjustments to your AGI is to contribute money to a 401k or similar retirement plan through your work. Some other methods of lowering your AGI include contributions you’ve made to a traditional IRA, payments you’ve made on student loans and alimony you’ve paid throughout the year. These adjustments to your annual income are basically deductions but you don’t have to report them on the Schedule A. You instead will report them on your 1040. Your accountant can guide you through properly preparing these adjustments.

Maximize Your Tax Deductions

Taxable income is another very important variable in determining how much you will owe in taxes. Taxable income is the amount left over after you’ve made deductions from your AGI in the manners discussed above. Everyone is eligible to make a standardized deduction each year, but a few individuals may benefit more by taking an itemized deduction. Talking to your CPA about available standardized deductions can help you to lower your taxable income, thus reducing the amount that you owe. Some common itemized deductions that may be available to you include health care, state and local taxes, gifts to charity, job related expenses and investment related expenses. In order to determine if your itemized deduction will be greater than your standard deduction, it is prudent to keep a list of deductions throughout the year-a spreadsheet usually works best for this. Keeping your itemized deductions organized in this manner will allow you to quickly determine whether your standard deduction or your itemized deduction will save you more money.

Use Tax Credits To Your Advantage

After you’ve adjusted the income that will be taxed, you and your accountant can then focus your attention on tax credits that may affect you. Tax credits reduce the taxes that you have to pay. There are credits available for college expenses, saving for retirement and adopting children, among others. There are other credits available and it may be beneficial to seek the help of your accountant to discern which credits apply to your situation. In addition to credits, it is also important to try to diminish the amount of extraneous taxes you may have to pay at the end of the year. For example, avoid pulling money out of your retirement fund early as this money will then become part of your taxable income, on top of the taxes you will have to pay for early withdrawal.

Tax time doesn’t have to be a pain in the wallet. With proper planning throughout the year and advice from your CPA it is possible to reduce what the government expects you to pay. If you need help with tax planning in the Pittsburgh area, give us a call today.