Smart Tax Saving Strategies: 4 Key Habits

Taxes might be the biggest expense you pay over your lifetime. Smart tax saving strategies can ensure you pay less taxes over your life.

In this post, I am sharing 4 key habits to keep more money in your pocket and reduce your headache.

Smart tax saving strategies begin with good habits

1. Stay current because the tax code changes.

tax codeThe tax code is so long, people cannot even agree on how long it is! Cautious estimates peg the code at 2600 pages, not including all the regulations (clarifications) and case law, which increases the volume exponentially. Multiple major tax reforms have been passed in just the last few years.

Staying current does not mean memorizing the tax code but keeping updated on the highlights of major changes and relevant laws can be helpful.

If you don’t care to be a tax expert, the simplest way to do this is to have a few “go-to” resources.

The Kiplinger Tax Letter hits on key updates formatted to easily focus on relevant issues. It is available for a minimal cost.

Great Twitter follows include: @CPAPlanner, @taxgirl, @MelindaNCPA, @Saunderswsj

2. Hire a tax pro to make smart decisions and increase peace of mind.

A quality tax professional, preferably a Certified Public Accountant (CPA), should provide more than enough value to cover their fee. In my experience, tax pros are regularly correcting mistakes by unsuspecting taxpayers.

Staying current, planning forward and greatly reducing mistakes might be hard to quantify, but it is hard to argue these benefits can bring great value.

A tax pro can on your side can help give you confidence and peace of mind. If the IRS comes calling with questions, a CPA or Enrolled Agent (EA) is qualified to represent you in front of the IRS.

Whenever I take on a new client, I ask who they use to prepare their taxes. I’m ready with referrals if they don’t have someone good because it’s that important.

3. Organize to reduce mistakes.

When my oldest son started driving, the first thing I told him was do not be in a rush. That is when accidents happen.

Disorganized tax preparation

Same with taxes. Most errors are a result of disorganization: Losing forms. Not knowing which forms to expect. Forgetting transactions made during the year. Rushing to meet deadlines.

At the beginning of each tax year, create a hardcopy file folder -and- an electronic file folder for that tax year. Whenever an important tax document is received, ensure it gets in one of those two folders. Simply having your documents in order can save you a frantic dash to beat a filing deadline.

Each folder should also include a “notes” page. Simply make a note anytime you transact something tax-relevant through the year. Did you do a Roth conversion? Make a note. How about a Qualified Charitable Distribution from your IRA? Note it. You get the picture.

“Know well the condition of your flocks, and pay attention to your herds.” Proverbs 27:23

This Proverb is not just for shepherds! Know what you have going on!

Besides the forms, notes and receipts, ensure you have money to pay your taxes. You’ll pay at some point whether it is through paycheck withholding, quarterly estimated payments, or just setting the money aside for when the payment is due. Do not expect the money will be there when you need it. Plan ahead.

Caution: the short list I mentioned above (withholding, estimates, paying when the return is due) is not a menu of choices. You generally must pay tax as you earn it. A quality tax pro can provide you the proper setup for your situation.

4. Follow the incentives to advance toward your goals.

The tax code incentivizes personal financial actions such as saving for retirement or bettering society through charitable giving.

Every incentive is not applicable to you but selectively identifying the incentives that advance toward your personal goals is important.

For example, contributing to a workplace retirement plan, such as a 401(k), can allow tax-deductible contributions while moving you toward a personal goal for retirement. The tax benefit further compounds returns on investments and any employer contributions you may receive by participating.

Let’s take this simple example a step further in following the incentives. If you are a high-income earner who easily maxes out their 401(k) each year, a little-known strategy often called a “Mega Backdoor Roth” might be a workable strategy to further compound the incentives of the tax code. Alex Okugawa wrote about the Mega Backdoor Roth and who should consider the strategy.

The focus on identifying incentives uniquely helpful to you is the habit that leads to smart tax planning.

Summary to build smart tax saving strategies:

Put these tax habits into place. They can serve as the foundation to build smart tax saving strategies.

  1. Stay current
  2. Hire a tax pro
  3. Organize
  4. Follow the incentives

Consult your tax professional to ensure tax strategies are appropriate for you.





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