Tax season is upon us. Although filing taxes has been known to bring on stress, frustration, and even confusion, tax planning can alleviate these woes. 

By arranging and analyzing your financial situation, you can minimize your tax liabilities and maximize your tax breaks. 

Navigating the tax system in America can be a harrowing experience. But, with proper preparation, you can make the whole process go a lot smoother and even save money as well.

Interested in learning more? Continue reading, and we’ll walk you through the top tax planning strategies you should know about. 

Understand Your Tax Bracket

You can try to stay informed about all the loopholes and tax breaks, but if it’s not relevant to your tax bracket, it’s not going to help you much.

The very first step to tax planning is knowing which federal tax bracket you’re in. Here in the United States, we have what’s known as a progressive tax system. This means that people with higher incomes will also pay higher tax rates. 

There are seven income tax brackets to know: 10%, 12%, 22%, 24%, 32%, 35% and 37%. However, no matter the bracket you’re in, you most likely won’t end up paying that tax rate on your entire income. 

There are two main reasons for this. First, you’re not taxed simply by multiplying your taxable income with your tax rate. The IRS splits your income into pieces and then taxes each piece at the corresponding rate. 

Second, you’ll have the opportunity to subtract deductions from your income. This is why your salary isn’t the same as your taxable income. 

Let’s look at an example:

Imagine you are a single filer who has a taxable income of $32,000. For the tax year 2019, that would put you in the 12% tax bracket. However, you don’t actually pay 12% on the entire $32,000.

Instead, for the first $9,700, you will pay 10%. Then you’ll pay 12% on the rest of the taxable income. 

Know the Difference Between Tax Credits and Tax Deductions

Tax credits and tax deductions may be the most fun part of preparing your tax returns. Both will lower your tax bill. Although they work in different ways. 

Knowing the difference between a tax credit and tax deduction will help you better implement your overall tax strategy.

A tax credit is when the government gives you a reduction in your tax bill, dollar-for-dollar. So a tax credit valued at $2,000 will lower your tax bill by $2,000.

A tax deduction is a specific expense that you had to pay that can be deducted from your taxable income. They reduce how much of your income can be taxed. These are extremely valuable, although tax deductions might not save you as much money as tax credits.  

Know Which Tax Records to Keep

Although many people may be reluctant to do it, holding onto the documents that you use to complete your tax returns is extremely important. In general, the IRS has three years to decide if they’re going to audit your tax return. So you want to keep your documents for at least that many years. 

Also, if you file a claim for a refund or credit after you filed a return, then you should hang onto those tax records. There are some circumstances where the IRS has a longer window of time to decide to audit you. Those circumstances include: 

• Six years if you reported that your taxable income was at least 25% less than it actually was
•  Seven years if you wrote off a loss from a worthless security
• Indefinitely if you didn’t file a tax return or you committed tax fraud

Make sure you keep your records organized and in a safe and private location.

Consider Putting Money in a 401(k) or IRA

Check with your employer to see if they offer a 401(k) plan that can give you a tax break on the money that you save for retirement. If you divert money from your paycheck directly to your 401(k), then that money can’t be taxed. 

For the tax year 2019, you can put at most $19,000 a year into a 401(k) account. People aged 50 or older can funnel up to $25,000.

Even though employers usually sponsor these accounts, a person who is self-employed can also open a 401(k). And if your employer matches your contributions, you’ll get free money added to the account. 

When it comes to IRAs, you have until the tax deadline in April to fund your IRA for the previous tax year. There are two types of IRAs: a traditional IRA and a Roth IRA. 

The main difference between these two retirement account types is the tax advantage. If you open a traditional IRA account, then you only pay taxes when you take your money out of the account. With a Roth IRA, you pay taxes upfront but don’t have to pay taxes when you finally take the money out of the account. 

The Importance of Knowing Top Tax Planning Strategies

Hopefully, after reading this article, you’ll feel like you have a better understanding of tax planning. Although filing your taxes may seem complicated at first, knowing what to look out for can make the whole process more enjoyable while also working in your favor.  

Hiring a CPA is a great way to make sure that your taxes will be filed properly and with the best chance for saving the most money. 

Need help with your taxes? Contact us today and see what we can do for you!

Your Medical Expenses May Save You Money at Tax Time, But a Few Key Rules Apply

Due to the 10% AGI threshold for taxpayers less than 65 years old, explained Krystle Dean, CPA, a senior tax manager for WNDE, clients often are not able to take the available tax deduction for medical expenses.  For a taxpayer 65 or older, the AGI threshold is reduced to 7.5% through 2016, she continued, “so it is more common to see those clients receiving a tax deduction for their medical expenses.”

Here are some Tax Tips to help you determine if you can deduct medical and dental expenses on your tax return:

• Itemize. You can only claim your medical expenses on your taxes that you paid for in 2016, if you itemize deductions on your federal tax return.
• Income. Include all qualified medical costs that you paid for during the year, however, you only realize a tax benefit when your total amount is more than 10 percent of your adjusted gross income.
• Temporary Threshold for Age 65.  If you or your spouse is age 65 or older, then it’s 7.5 percent of your adjusted gross income. This exception applies through Dec. 31, 2016.
• Qualifying Expenses.  You can include most medical and dental costs that you paid for yourself, your spouse and your dependents including:
  • The costs of diagnosing, treating, easing or preventing disease.
  • The costs you pay for prescription drugs and insulin.
  • The costs you pay for insurance premiums for policies that cover medical care qualify.
  • Some long-term care insurance costs.

Some common examples of expenses that taxpayers can include in their medical expenses but they may not be aware of, Krystle noted, are acupuncture, chiropractic care, inpatient rehabilitation facilities, long-term care premiums (limited depending on age) and certain weight loss programs.  Some cosmetic surgeries, related to accident, disease or congenital abnormality, also can be deductible.  Krystle continued, “If there are certain treatments that your doctor recommends, it may be something that is a tax deduction, so please consult your CPA accountant.”
Costs reimbursed by insurance or other sources normally do not qualify for a deduction. For more examples of costs, you can and can not deduct, see IRS Publication 502, Medical and Dental Expenses. You can get it on IRS.gov/forms anytime.

• Travel Costs Count.  You may be able to deduct travel costs related to medical care. This includes costs such as public transportation, ambulance service, tolls and parking fees. If you use your car, you can deduct either the actual costs or the  standard mileage rate for medical travel. The rate is 19 cents per mile for 2015.
• No Double Benefit.  You can’t claim a tax deduction for medical expenses paid with funds from your Health Savings Accounts or Flexible Spending Arrangements. Amounts paid with funds from those plans are usually tax-free.
• Use the Tool.  Use the Interactive Tax Assistant tool on IRS.gov to see if you can deduct your medical expenses. It can answer many of your questions on a wide range of tax topics including the health care law.

“Keep all records of income and deductions until the statute of limitations runs out,” Krystle said, “which is three years from the date taxpayers file their tax returns for federal and four years for California.”
Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.
Have more questions or looking to offset some of your filed taxes with medical and dental deductions? Contact a WNDE tax accountant and who can better assist you in maximizing your tax services to get the most savings possible.

Additional IRS Resources:

• Schedule A (Form 1040), Itemized Deductions
• Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans

IRS YouTube Video:

• Medical and Dental Expenses – English | Spanish | ASL

IRS Podcasts:

• Medical and Dental Expenses – English | Spanish