How to Keep Your Tax Bill as Painless as Possible

Paying taxes is one of the two guarantees in life. The other one sucks too! It’s one of the largest expenditures we’ll make during our lifetimes. In addition, we have to go through pins and needles just to determine how much of our income the government is taking (wasting). Congress passed a tax reform bill that will make it a little simpler. However, the tax code is still complex, and doesn’t take effect until 2019 (for the 2018 year). It would be nice if we had something simple like the Transaction Tax on Deposits. That is a discussion for another day. Here are some things to help ease your pain.

Capital Gains

Capital gains are treated differently that ordinary income and are taxed at a lower rate. The reason is to encourage investment and compensate the additional risk incurred. Why would anyone commit capital to a risky venture if they would be taxed the same way as investing in a CD? Without investment, the economy won’t grow and fewer jobs will be available, thus reducing wages for the masses.

Put as much time as possible between the sale of the asset and taxes due. Selling an asset early in the year is the most desirable. That way, you have use of the money for a longer period before you write that check to Uncle Sam. Use end-of-year losses to offset gains. If losses are greater than gains, the maximum loss carryforward is $3,000. You must apply anything over this amount to future years. Finally, deduct a security as worthless the first year you believe it to be.

Deductions

The best way to reduce your tax liability is to create as many deductions as legally possible. Legally reducing your tax liability is not the same as evasion. That is illegal and you could go to jail. Be aggressive. The chances of an audit are miniscule. If you are audited, bring a recording device to the meeting.

The two biggest deductions are contributions to retirement accounts, and mortgages. 401K contributions are made on a pre-tax (taken out of your check before taxes) basis. Not only is your taxable income reduced, your net worth grows faster due to compounding a larger base and in most cases, an employer match. Homeowners should consider a home equity loan to pay off unsecured debt. You’ll get a lower interest rate and the interest is tax deductible.

Tips

• A tax refund is not found money. It’s your money that you overpaid to the government throughout the year. In essence, you made an interest free loan to Uncle Sam. If you are a bad saver, use refunds as “forced” savings. Otherwise, increase allowances to have less deducted from your check. Each allowance is worth about $600.

• Keep tax records for 7 years

• Keep receipts for items greater than $25

• Aim for a range of 18-25% for total taxes (Fed/State income, payroll, etc.)

• Some good online filing sources: Turbo Tax, Tax Act, and Tax Slayer

Paying your taxes doesn’t have to be like going to the dentist. With some planning and preparation, April 15 can be a (somewhat) painless day.

Have I left anything out?