There is nothing wrong with reducing your taxes. Taxes can be reduced without fear of violating any tax laws or the risk of an audit, providing that you doing everything according to tax laws, and you maintain the proper records. Your taxes can be reduced by taking advantage of deductions and credits available to the tax codes. Deductions allowed by the IRS are subtracted from your adjusted gross income. Credits reduce the amount of taxes you owe. Generally a credit is better than a deduction. Consider discussing with your financial consultant or tax preparer some of the following tax-savings techniques:
Tax-free income
Tax-deferred income
Tax-sheltered income
“Bunching” deductions
Prepaying deductible taxes (Make an extra payment on property taxes for example)
Tax-advantages investments
Postpone income (taking that Christmas bonus in the next year for example)
1031 exchange for real estate sales
There are many other examples that may fit your situation. As an example, consider the difference between the yield on tax-free bonds as compared to the return on a bank savings account.
Taxes can be reduced legally and conservatively, and every taxpayer may feel comfortable in doing so. Consider this statement from U. S. Appeals Judge Learned Hand:
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.” Source: in the case of Gregory v. Helvering (1935)
Tax laws change frequently; consult with your tax advisor for the latest changes and how they may affect you.
Self-Evaluation Taxes
This self-evaluation helps you determine if your tax plan is in order and you are taking advantage of all deductions and credits available to you. Simply answer each question yes or no.
1 Are you paying the lowest possible taxes?
2 Are you using every available deduction?
3 Does your tax situation trigger the Alternative Minimum Tax (AMT)?
4 Do you understand which investments trigger the AMT?
5 Are you faced with receiving a lump sum distribution from a retirement account and need to know the best approach to invest it without paying taxes?
6 Can you defer your income from one year to the next to your advantage?
7 Would accelerating deductions benefit you?
8 should you consider refinancing your house to take advantage of a lower rate of interest?
9 should prepay your real estate taxes to increase you deductions?
10 should you consider the use of tax-advantaged exchanges of real estate to defere taxes?
These questions and many others may effect your taxes this year and in the years ahead. Find a trusted tax advisor to review your taxes each year before filing season, many times a tax preparer will do this for free in the fall months, as business is slow and they will hope you come back to them to file your taxes.
Building A Base For Family Financial Freedom
If you set out to build a house, you need a plan, a set of blueprints so you know what you want to accomplish and what steps are needed to accomplish your plan. It’s the same for your financial affairs, except it’s called a financial plan and the good news is you can do most of it yourself.
Laying the Foundation for Financial Success
When you set out to build a financial plan you need a few basics. At the base of your plan is a clearly defined set of goals or objectives. If you are married, it works best if your and your partner can agree on the objectives, so you are working in a common direction. You also need a clear understanding of your net worth and a process for budgeting your income. Your personal financial plan, including how you handle taxes insurance, estate and investment planning is an extension of your preferences for saving, dealing with inflation and handling risks.
Next comes planning for ways to reduce your tax obligations. These were all covered in the earlier chapters of this book, so we have laid out a very solid foundation and can move forward.
After you have build a solid foundation you can add to it, by building the framework of the house. This includes proper insurance for protection and a savings program to provide for planned spending, periodic expenses, and an emergency fund. This framework becomes the solid walls you need to construct the roof of your house.
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