We typically only think about taxes when preparing to pay Uncle Sam. Making small changes to how you look at and approach your finances and taxes throughout the year, however, can add up to big savings on your taxes. There are many strategies that can be used, but here are five just to get you started.
Regularly reviewing your business’ financial reports on a regular basis may seem obvious. But surprisingly many people go through the act of making sure their reporting is in order without actually reading the reports. The reports are essential for effectively setting goals, ensuring you are meeting your goals, and understanding what your tax responsibilities are and will be on an ongoing basis so that you have a clear picture of your business’ health.
All income received on or before December 31 is taxable for that calendar year. Based on your financial reports, determine whether you can afford to shift income from revenue until after January 1, reducing your taxable income for the calendar year. This small change, however, relies heavily on the financial reports that are discussed above. Before making the decision to shift income until the following year, make sure that you have the resources necessary to close out the month and year.
Just as deferring income in December can help you save on taxes by reducing your taxable income, making large purchases in December – which can be written off as a tax deduction – can also help you save big on your taxes. Do you have equipment that needs to be upgraded or can you stock up on office supplies? Do you have vendor payments that you can make in advance? Again, however, if you choose to make purchases in advance, review your financial reports to ensure you have the means to make the purchases.
Conventional wisdom tells you to maximize contributions to IRAs, 401(K)s and other retirement plans. While that may save taxes in the current year, you have to ask yourself, “How long until I retire? What will tax rates look like then?” With over $25 trillion in public debt, imagining tax rates being lower than they are today is hard. Many professionals believe that they will be in a lower tax bracket in retirement when they are no longer commanding large salaries. Again, think about what your current income is going to be like. If you are maximizing contributions to a defined benefit plan that could double once, twice, possibly 3 times before you reach retirement, the required minimum distributions will likely keep you in the highest tax brackets. Even if you are in a “lower” tax bracket than you are currently, the tax due on a larger taxable distribution could still mean more dollars being paid to cover your tax liability. Instead, consider creative ways to fund Roth IRAs and other future tax-free buckets of income.
Donating to your favorite charity can be fulfilling and beneficial for you personally and for your business. Some charities prefer monetary donations – think American Cancer Society or the United Way – but others accept food, clothing, toys, and other goods. In addition to being a good steward of the community, any donation you make is tax deductible for the fair market value of the items donated.
The biggest small change you can make that can add up to big savings, however, is to make tax planning a year-round process so that you can minimize your tax liability for the year by planning ahead. TSP Family Office guides business owners and high-net worth individuals to tax-advantaged strategies found within the Tax Code to ensure they save more of their hard-earned money. To learn more, call (772) 257-7888.