A major benefit to proper year-end tax planning enables you to save money. Doing a tax plan enables you to uncover possibilities to withdraw money from the IRA in the current year and not paying any tax. Sounds good?
You will also be able to convert a portion of your regular IRA into a ROTH IRA, which means you pay tax at 15% rates. You can harvest this capital gains at 0% tax rate. These opportunities will not be present if you do not do some form of tax planning before the year ends.
So how do you do tax planning? Here are three ways to go about it:
1.You can use An Online Calculator
Using a tax return calculator to calculate your tax return on your federal tax liability is a good way to begin. Using a tax calculator will help you estimate your exemptions, deductions and tax credits. To get this done, you would need to gather certain information such as your tax return from last year, your pays statements to show your income and your retirement plan contributions and investment statements. Using an online calculation tool helps you factor in current changes in tax laws, enables you to input information based on your current needs and it delivers accurate answers. Keep in mind that the major thing you need to do is compiling the information and keeping it inaccurately into the system.
2. Look at your previous year’s tax return
Another way to plan your year-end tax is to look at your previous year’s return and, in the margin, write down your estimate of this year’s numbers. This can be a ballpark figure, but you can get more detailed as you put in figures in every line of entry. When you are done putting in the numbers, do the calculations with the new figures to get an estimate of your taxable income so you can see which tax bracket your income falls into. This method is a simple and quick way to get a ballpark estimate.
3. Hiring a professional
Of course, if you have the budget, you can get a qualified financial advisor to help you run a year-end tax projection for you. This way will not only give you accurate results, but the advisor will also be able to dispense recommendations. As with all the methods above, you would need to provide an estimate of all the expenses, income and investment that will impact your tax return. Most of these advisors will charge you an hourly rate so make the best of your money and their time by asking them for advice on retirement plans, ways to increase deductions and other concerns you may have with your taxes. A professional tax advisor will be able to help you gather accurate information for your tax planning and advice specific actions for your tax refunds.
No matter what method you ultimately choose, doing your year-end tax planning is always a wise and fruitful way of healthy financial management. It will prepare you for next year’s expenses, taxes, income made, bills owed and so on.