Well, friends! It’s that time again. Tax filing season is upon us. Many of you are seeing big changes in your tax returns this year. Some to the tune of tens of thousands of dollars. And, you may be wondering why.
While I’ve never seen any two returns that look exactly alike, there are several things that they all have in common. In this post, I’m sharing three things that’s might be impacting yours to help you understand how to move forward.
Factor #1: Taxable Income
The “Income” section on your tax return is where you report your taxable earnings. And, yes, this is where reality sets in. At this point you get to see, in black and white, how your job promotion, fast-growing business, or lucrative passive income streams are causing your tax changes.
In an ideal world, the goal is to keep an eye out on income increases and have a strategy to manage the tax on them. This includes finding ways to keep more of the money you make so that you can enjoy more savings. But, if you’re like many others, tax planning probably didn’t make it to the top priority list. So, you end up surprised by the amount you end up paying.
The question to ask yourself is “How much did your household income change in the previous year?”
This is the beginning of tax awareness — to understand the amount of income you earn so you’ll know how much tax you’re paying.
Factor #2: Life Events
Did you get married or divorced last year? Were you blessed to add a child to your family? Is a member that you claimed previously no longer in your home? If either of these took place, then your tax filing status might change.
For example, consider a married couple whose daughter is in college. The child worked throughout the summer and received more than half of her support from her parents. Her mom and dad want to know, “Should she file her own taxes?”, “If she does, will that negatively change their return?”, “When she graduates, does that disqualify her to be claimed as their dependent?” These, and other questions like them, are part of the tax planning process. Unfortunately, tax savings that come in the form of choosing the right filing status is often overlooked. The result? Filers who are paying more taxes than they should.
The question to ask yourself is “Has there been a change in my marital status or the number of people that I can file this year?”
Change #3: Lifestyle Adjustments
Another part of the equation is adjustments you can claim to lower your income. Think of it as getting income as low as possible before you take deductions. Just be sure that you understand the rules and know how to apply them.
If you’re spending in the category of college, career, or self-employment, then there’s probably some adjustments you can make. The Educator’s Expenses for teachers, or Health Savings Account Deduction, Self-Employment Pension Plan, are all examples of ways to lower your gross income.
The question to ask yourself is, “Where does my income go throughout the year?”
As you can see, tax savings opportunities abound for those who are proactive. You can legally cut your tax bill by knowing what strategies are available and how they apply to you. The greatest benefit comes from starting early and following a plan throughout the year. And, if you’re wondering how to get started with a tax savings plan, post a comment with your question below.