Your mid-year checkup: Get savvy about lowering your taxes
Are you still owing the IRS in taxes every year?
Not a great situation to be in, is it? But there is still hope for this year. You have almost six months, in some cases a little longer, to make certain you owe less tax, and possibly no tax, next year.
Here's a blueprint that outlines the keys to lowering your taxes and remaining audit proof. Follow these keys and you're guaranteed to lower your taxes by hundreds, if not thousands, of dollars!
Key #1: Consider a Home Office Deduction
Many taxpayers have avoided the home office deduction because it has been regarded as a red flag for an audit. If you legitimately qualify for the deduction, however, there should be no problem.
You are entitled to write off expenses - such as rent, utilities, insurance, and housekeeping - associated with the portion of your home where you exclusively conduct business. A middle-class taxpayer who uses a home office and pays $1,200 a month for a two-bedroom apartment could easily save $1,200 in taxes a year. People in higher tax brackets with greater expenses can save even more
Key #2: Organize your Records
Good organization may not cut your taxes. But there are other rewards, and some of them are financial. For many, the biggest hassle at tax time is getting all of the documentation together.
How do you get started?
·Collect receipts and information that you have piled up thus far.
·Group similar documents together; putting them in different file folders if there are enough papers.
·If you have time, enter the amounts from all these documents into a computer program like Quicken or Microsoft Excel for quick totals and make a printout for your tax preparer.
You can expect savings of $300 to $400 with your tax preparer and hours of your time. Plus, you're likely to sail through an audit - with fewer assessments and penalties - if you have documentation on hand.
Key #3: Contribute to Retirement Accounts
If you haven't already funded your retirement account, do so by April 15, 2005. Making a deductible contribution will help you lower your tax bill. Plus, your contributions will compound tax-deferred. Your savings will vary. If you are in the 25% tax bracket and make a deductible IRA contribution of $3,000, you will save $750 in taxes the first year. Over time you will save thousands, depending on your contribution, income tax bracket, and number of years you keep the money invested
Key #4: Find a Tax Advisor
Did this year's tax season feel like a never-ending nightmare of tax forms and a huge tax bill? Then now is the time to take another look at 2003 and plan for the current tax year. First look back at the process you went through in compiling your returns. Do you have a huge tax bill or tax refund? Was your tax preparation software helpful? Did your professional tax preparer meet your needs?. Any good preparer should save you at least as much as the fee they charge. You may also gain valuable advice on how reduce your taxes for the coming year. But don't wait until the last minute.
Ask friends and family for recommendations. Ask about credentials and professional designations. There are two designations to look for in a tax preparer. Enrolled agents (EAs) have passed rigorous IRS exams and are certified to represent clients in tax court. CPAs, or certified public accountants, have also passed several examinations and are licensed to practice by the state.
Interview your top candidates to see if you feel comfortable with them. Do they have the expertise for your specific situation? And will they be available for questions after tax season is over. When you first meet to talk about your taxes, be prepared to talk about your personal life. Your preparer isn't just being nosy. Personal details can have important tax implications. Are you planning to get married or divorced? Are you looking to buy a house? Such life events show up on your tax return as dollars and cents.
Savvy overseeing of your financial books will enable you to build a life and/or company that thrives. And it's literacy that enables you to do that.
About the Author
Dorothy J. Griggs, EA is an established tax and business accountant who specializes in showing taxpayers how to take advantage of every tax deduction legally allowed.
Dorothy Griggs, EA