Three Ways You Can Flip the Script on Your Taxes
Does it feel like the tax code is beating you up at times? Instead of accepting that feeling of getting pushed around, here’s how you can pay what you must but no more.
Is it really possible to turn a bully into a buddy — or maybe a temporary ally, at least?
It happens all the time in the movies and on TV — from The Breakfast Club to Cobra Kai. But what about in real life?
Let’s talk about taxes.
What if I told you that you could flip the script, and instead of feeling pushed around by IRS rules, you could actually use the U.S. tax code to help lower your tax bills?
Most people probably don’t think about it much — maybe because it would be too painful –– but a reasonably successful person could end up spending more on taxes than on any other expense. With income taxes, sales taxes, property taxes and, possibly, estate taxes, during your life you might see a third or more of your money go to the federal government and your state and local governments.
The average American will pay $532,910 in taxes over his or her lifetime, according to the website Self Financial, which gathers expenditure and income data from a variety of sources, including the U.S. Bureau of Labor Statistics. And yet, I still see people spending way more time trying to pinch pennies at the grocery store or gas pump than figuring out how to lower their tax liability. Or they’ll try to increase their investment returns by a few percentage points — sometimes putting their nest egg at risk — instead of looking at the many tax strategies that could save them money.
Can you turn the tables on the tax code?
You probably can’t eliminate taxes from your life entirely. But that doesn’t mean you have to keep writing checks for more than your fair share. I like to put it in terms of mandatory vs. voluntary taxes — or pay what you must but no more.
The tax code (officially the Internal Revenue Code, or IRC) includes an enormous number of incentives that could help you pay less in taxes. But to take full advantage of the deductions, credits, exemptions and exclusions that can turn the IRC into your BFF, you have to have a plan.
Step 1: Be proactive instead of reactive
Many Americans file their income taxes every year with the help of tax-preparation software or a tax-preparation service. And though they may receive some good advice during the process, and they’ll likely find some deductions for that current tax year, it’s mostly an after-the-fact way of looking at taxes.
It’s definitely not the same thing as tax planning, which encourages you to look to the future, evaluate the consequences of certain actions and make choices that could minimize your tax bill in the years — or even decades — ahead.
You might consider the long-term benefits of contributing or converting to a Roth IRA to save on taxes in retirement, for example. You could look at improving the tax-efficiency of specific investments you have in your portfolio instead of focusing strictly on returns. Or you may find setting up some sort of trust is the solution you need.
Keep in mind, though, that these and other moves with the potential for significant tax savings can take time to put in place. Typically, you can’t wait until the last minute to make these strategies work for you.
Step 2: Find your edge — and use it
The tax code has a little something for everyone when it comes to both perks and penalties. If you feel as though you’re being picked on by the IRS — or you’ve been punched in the gut on April 15 more times than you’d like to admit — it could be because you aren’t making the most of tax breaks you have coming to you.
- Are you a parent, a spouse or a widow?
- Are you a homeowner or a member of the military who’s planning a move?
- Do you own your own business, or are you self-employed?
- Are you a diligent retirement saver or a generous charitable giver?
- Are you paying for college — for yourself or someone else?
Try going to IRS.gov and searching any topic that might apply to you and your family. From childcare expenses to home office costs to credits for older people or people who have disabilities, the IRC is full of opportunities to turn the tide on your taxes. You just have to understand what’s in there and how you might be able to get those savings, both now and down the road.
Step 3: Get the right people behind you
When it comes to bullies (fictional or real-life), it isn’t always easy to change the dynamic all on your own. Sometimes it takes one or more helpers with experience or inside knowledge to help assist with the transformation.
When it comes to dealing with the dense and ever-evolving IRC, almost any strategy you might consider could get complicated. You can do your tax planning yourself, of course, but if you get it wrong, you could land in some trouble and possibly even incur a hefty penalty.
If, on the other hand, you have or can find a financial advisory firm that offers proactive and holistic tax planning as part of their services, you can make them part of your team. These advisers could then help you integrate your tax and overall financial planning.
If you do seek tax planning from a financial professional, remember, credentials matter. Finding a firm that has a certified public accountant (CPA) or an enrolled agent (EA) on staff is a great place to start. Both have completed IRS-approved tax training and can present tax cases to the IRS. These are the types of folks you want on your side.
With the lower tax rates put in place by the Tax Cuts and Jobs Act (TCJA) scheduled to sunset at the end of 2025, there has never been a more critical time to turn your attention to tax planning. If you feel as though the tax code is beating you up year after year, proactive tax planning can give you the necessary tools to take back control and lower your future tax bills.
Keep reading the original article posted here.
Originally published on Kiplinger.com. Kim Franke-Folstad contributed to this article. Written by Scott M. Dougan, RFC, Investment Advisor. President & Founder, Elevated Retirement Group.
