How to pay less Federal Income Tax

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How to Pay Less Federal Income Taxes

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Zero Income Tax? Not True!

If you want to live in America, you have to pay federal income taxes. There is no such thing as zero taxes for individuals (except for those receiving the earned income credit or non-taxable benefits). Businesses could pay zero taxes which means they are losing money.

It’s not worth your time and effort to scam the IRS. The downside to scamming is significant. The little bit of cash you might save will haunt you tenfold later on. Those who write books or gain publicity from the "don't pay tax scams" are selling ideas that do not work. It's fine for them to have these ideas because part of the way the sell it to you is because it is outrageous. Eventually the IRS catches up with the schemers. If you get caught scamming you will pay back every penny you scammed, this will advance your potential debt even further. You will pay interest and penalties, and you could go to jail. Be smart with the money you are trying to save, choose a merchant cash advance wisely for your business. Set up a budget and make savings for the taxes you will owe. Proper planning will make tax time much easier!

Plan Ahead

Thinking about ways to save money at tax time is too late. The tax year ends on 31 December. Worrying about ways to save money on your taxes between January and April is a wasted effort. There are very few last minute ways to save money on your taxes. You need year-round tax planning. You should at the very least fill out a W-4, Employee's Withholding Allowance Certificate (available for download at IRS Form and Pubs ) so you can estimate what your annual income and tax payment will be. That way you can increase your withholding if you are under withheld. (You are required to have the correct amount of tax withheld from your salary and/or to make estimated tax payments. Failure to have at least 90% of your tax liability (the total tax you pay) withheld or to have an amount equal to your previous year’s tax liability withheld will result in an underpayment penalty. (Plus, it could ruin your vacation plans.)

Good record keeping is important. Make sure you have written records including: receipts, canceled checks, bank statements, copies of all tax records, journals and logbooks or any other document that supports your deduction. Verbal support is the least desirable method of evidence.

4 Tax Strategies You Should Use

1. The best tax deduction you have is the interest and property taxes on your primary residence. It is also one of the best investments you can make providing you are willing to keep the property in good shape. For your house to appreciate, you need to buy a house in a descent neighborhood with good schools and a low crime rate. Ask people who own houses about their neighborhoods and how much appreciation in value they have experienced. Most homeowners love to talk about both subjects! (First-time home buyers may be eligible to take the mortgage interest credit.)

2. Another good deduction is the interest on home equity loans. (**Warning * * This is not a good idea for people that have difficulty paying off their debts. Failure to pay on an equity loan could result in the loss of your house.) If you own a house, you should not be carrying any long term credit card debt (the interest rate is way to high and not deductible). You should get a home equity account and borrow money against the equity loan and not your credit cards. You can generally deduct up to $100,000 of equity loan interest in addition to your first mortgage interest deduction. You cannot deduct credit card, car loan, or personal loan interest unless you have a business (the interest must be from business debts).

3. Give and you will receive a nice Charitable Contribution Deduction. Give away all the unused items (notice I didn't say "junk") collecting dust in your attic, basement, and closets and receive a nice tax deduction along with the relief of getting rid of the stuff. Make an itemized list of what you are donating and the thrift shop, or fair market value of the items. Get a receipt from the charity and staple it to your itemized list. Total your itemized list and save it somewhere safe until tax time. You can donate old cars too. Several organization will take old cars as donations and some will even tow them away. (See Publication 17, Your Personal Income Taxes, and Pub 526 Charitable Contributions for more details.)

4. Put money in a Keogh or Tax Deductible IRA. Money you contribute to these accounts is not taxed. Not only does this make good tax sense, but it is the best way to save money. Hey the government is contributing what would have been taxed to your Keogh/IRA account by excluding your donations from income tax. What could be better than that?

Ups and Downs of Tax Preparers

1. Supermarket/Discount Tax Preparers - These people have varying amounts of experience. Providing you give them the necessary documents, they should be able to provide you a mathematically correct tax return. While cheap, they don't do a lot of probing for deductions and their is little or no tax planning.

2. Do it Yourself Computer Programs - Good for those that have simple returns and want to do their own taxes. None of the programs do a good job on complicated returns/decisions. I have to over-ride the programs and fill out the forms myself whenever I use one. However, most of the programs have all the necessary tax forms and do a good job of adding correctly and printing the return. Some programs have a little tax planning built-in.

3. CPAs - They should provide you the best service and most accurate return (of course, their fees will usually be higher). You should get a free initial consultation, prior to any work performed. Ensure that they have successfully completed a degree program at a CPA school or an equivalent program. Ask them what you could do different to save money on next year's return. Shop around and find a CPA you like.

 

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