Year after year, taxpayers fork over a chunk of their hard-earned income to the government in the form of taxes. And while it’s true that we all have to pay our fair share, there’s no reason why we can’t do some tax planning to ensure we’re not paying more than we have to. After all, every dollar counts!
As an accountant, you’re in a unique position to help your clients save on their taxes. But in order to do that, you need to be up-to-date on the latest tax laws and strategies. Here are three basic tax planning strategies every accountant should know about.
Reduce Your Overall Income
One of the simplest—and most effective—ways to reduce your tax liability is by reducing your overall income. This can be accomplished in a number of ways, such as working fewer hours, scaling back on overtime, or taking a pay cut. Of course, this isn’t always possible or practical, but it’s worth exploring if you’re looking for ways to lower your tax bill.
Stay Within the Tax Brackets
The first step in effective tax planning is to understand the tax brackets. The federal income tax system is progressive, which means that taxpayers are taxed at different rates based on their income level. The higher your income, the higher your tax rate will be.
There are currently seven federal income tax brackets, with rates ranging from 10% to 37%. So, if you can keep your income within a certain bracket, you can minimize your tax liability. For example, let’s say you’re a single filer with an annual income of $50,000. That puts you in the 22% tax bracket. But if you can find ways to reduce your income to $40,000, you’ll drop down to the 12% bracket. That can save you a significant amount of money come tax time.
Increase Your Number of Tax Deductions Throughout the Year
Another way to reduce your tax liability is by increasing your number of deductions. This means taking advantage of any and all deductions you’re eligible for, such as those for home office expenses, charitable donations, and medical expenses. The more deductions you have, the lower your taxable income will be—and the less you’ll owe come tax time.
This includes both above-the-line deductions, which can be taken regardless of whether you itemize your deductions, and itemized deductions, which can only be taken if you itemize.
Take Advantage of Certain Tax Credits
In addition to deductions, there are also a number of tax credits available that can help lower your taxes. Some of the more common credits include the earned income credit, the child tax credit, and the American Opportunity Tax Credit (AOTC). Be sure to explore all the credits you may be eligible for so you can take full advantage of them come tax time.
The third tax planning strategy is to invest in tax-advantaged accounts. These are accounts that offer special tax benefits, such as the ability to grow your money tax-free or deduct your contributions from your taxable income.
There are a few different types of tax-advantaged accounts, including traditional IRAs, Roth IRAs, and 401(k)s. Each has its own set of rules and benefits, so it’s important to do your research to find the best option for you. But investing in one of these accounts can help you save on your taxes in the long run.
Tax planning is an important part of financial planning. By understanding the tax brackets and taking advantage of deductions and tax-advantaged accounts, you can save yourself a lot of money come tax time. As an accountant, it’s your job to help your clients do just that.
By following these three simple strategies—reducing your overall income, increasing your number of deductions, and taking advantage of certain tax credits—you can minimize your tax liability and keep more of your hard-earned money in your pocket come tax time. So why not put them into practice today? Your future self will thank you!
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This article is for informational purposes only and does not constitute tax or financial advice. It’s always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to your situation and your personal finances.