This is a post by Nancy Evans.
A big part of every individual’s personal finance budget is taxes. Poor planning can lead to higher than expected tax payments. These unplanned payments can put a huge strain on your cash flow. To avoid this problem, consider taking these steps to minimize your taxes.
Avoid overpaying and waiting for a refund
As this article points out, overpaying your taxes and waiting for a refund is a poor decision. In essence, your overpayment is a loan to the federal government. You also don’t earn interest on the dollars that you’ve overpaid. The IRS has stated that, due to understaffing, it will take longer for taxpayers to receive their 2014 refunds than in past years. Claiming a refund and waiting for your payment can tie up a great deal of cash.
To avoid this problem, closely estimate your tax liability for the year. If you work for someone else, make sure your Form W-4 includes the proper withholdings amounts to cover your tax liability without generating a large refund.
If you're not comfortable with tax issues, consider working with a tax accountant.
File your return and make payment on time
Make sure that you file your return on time, and also pay your entire tax liability on time. If the taxpayer files the return on time- but pays the tax liability late- that individual is subject to a penalty. The IRS also charges interest on any balance owed, so pay on time to avoid interest payments.
Track business and personal transactions carefully
Even if you’re working as an employee, you may incur business-related expenses that are not reimbursed. It’s important to carefully track any business expenses you incur. Hang onto your bank statements and review them at year-end. Consider a system to keep business related receipts- maybe in an envelope. If your business related expenses are high enough, they may be deductible on your personal tax return.
If you're starting a new business, you may be able to deduct some expenses quickly. According to the TaxBuzz blog, a business owner is able to deduct up to $5,000 of start-up expenses and $5,000 of organizational expenses. Organizational expenses can include legal fees related to forming the business.
Pay attention to Schedule A
Taxpayers compute itemized deduction on Schedule A of the individual tax return (Form 1040). If the total deduction amount on Schedule A is more than the standard deduction, the taxpayer uses the higher deduction total from Schedule A on the tax return. Take a look at the Schedule A form, to get a sense of the types of deductions you can take.
There are several important deductions on Schedule A that many taxpayers may neglect. These areas can generate more deductions, which can lower your overall tax liability.
Schedule A allows you to deduct out-of-pocket medical expenses. Medical expenses can add up quickly. Go through your bank statement and look for co-pays of other expenses that were not cover by insurance. If a family member has an illness or a hospital stay during the year, the total can add up quickly. This deduction is allowed if the total is above a certain percentage of your income. Check with a tax preparer to find out more.
Charitable giving is another area that can add up to a large deduction. Some taxpayers miss these gifts, because they contribute many small amounts during the year. Keep in mind that donating clothing and other items can be considered part of your charitable giving. A tax preparer can provide a reference, so you can compute the value of donated clothing, toys and other items.
Use each of these tips to minimize the impact of taxes on your personal finances.