The point of tax planning is to reduce your tax liability, by as much as possible, within what the law allows. A lot of people like to talk in terms of loopholes, but the reality is that our tax code is complex, and that means that there is a lot of room for tax planning, and reducing what you owe.
Common Tax Planning Moves
When it comes to tax planning, there are plenty of moves you can make right now. Many people in the middle to upper-middle class can do a little tax planning to reduce tax liability and pay less. Here are some of the more common tax planning moves:
- Itemize deductions: If your deductions add up to more than the standard deduction, you can itemize. This means that you fill out Schedule A, rather than just filling in the amount offered as a standard deduction on your tax form. If you have a mortgage and pay interest, and if you tithe regularly or give substantially to charity, chances are that you could itemize. That opens up other opportunities for your to deduct.
- EITC: The Earned Income Tax Credit is available to those with lower to lower-middle-class incomes. If you don’t take it when you could, you are missing out on a great way to reduce your tax liability.
- Dependent care credit: If your child goes to daycare, you might qualify for this credit, which can reduce your taxes. This credit can also apply to the care you pay for when it comes to an aging parent.
- Investment loss harvesting: If you have capital losses from investments, you can deduct them. You can use them to offset any capital gains, and they can also be deducted, to a certain extent, from other income. It’s a good way to turn some losers to some sort of advantage.
- Business deductions: Don’t forget to consider your business deductions. If you run a home business, you can deduct your expenses. Additionally, you can benefit if you pay for items related to work you do for others. If you have to pay for a work cell phone, or if you have to buy uniforms, you can deduct those items from your taxes.
- Trusts: This is a common strategy for those in the upper -iddle class and those higher up the socioeconomic ladder. There are different trusts that perform different functions, but the right trust can reduce your estate taxes later, and help you provide a legacy for your heirs.
The reality is that there is ample room in the tax code for you to find an advantage or two. What’s difficult is when you wait until the last minute to figure out what you can take. It makes sense to look at your situation at the beginning of the year and plan ahead. Tax planning for the year to come, as well as looking ahead for decades, can help you reduce what owe — and do it legally. If you have questions, it can make sense to talk to a tax planning professional and put together a solid plan.