People are always asking tax questions and tax advice before calculating their tax liabilities and subsequently filing it during a fiscal period. Doing taxes can be quite tedious and sometimes aggravating without any guidance or tax advice from the those who are knowledgeable in the ins and outs of federal taxes.
To steer clear of making mistakes or paying for something that could have been avoided, there are plenty of money-saving tax tips and free tax advice available from tax professionals. The following are some tax tips to answer common tax problems.
The most important tax advice is to maximize tax deductions. Know the different federal tax deduction available to taxpayers in order to lower a person’s income tax before tax filing. There is a list of tax breaks allowed by the Internal Revenue Service or IRS that may constantly change in conjunction to the current government administration since federal tax constitutes a part of the government’s initiatives.
For those who are 70 ½ and above and are entitled to receive a minimum distribution if they have simple IRA or traditional IRA, one of the best tax tips is not to pay below the minimum to avoid incurring a 50% excise tax on the shortfall. For those younger than 59 ½, it’s wise not to take an early distribution from the 401(k) or IRA account to avoid paying a 10% early distribution penalty.
A smart tax advice for single people is to claim a parent, nephew, niece, grandparent, brother or sister as dependents and file as ‘Head of Household’ instead of single to receive a bigger federal tax return on the following fiscal period. For divorced parents that have no claims as custodian of a child as a dependent, they can still claim the earned income credit, dependent care credit and ‘Head of Household’ status along with the child tax credit with the dependency option.
To save on federal taxes, one of the best tax tips for those filing for divorce is to do it before the end of the year. This will eliminate the marriage penalty if both spouses are earning the same amount of money. However, if one spouse is earning more than the other, it is wise to file a divorce in January to take advantage of the one-year marriage bonus from the previous year.
Many people often neglect to file an extension to complete their federal tax return before April 15th because of many reasons such as they don’t have money to send with the extension. It is alright to send an extension even without payment. This is to avoid an eventual five percent penalty charged for every month late in filing and would therefore allow individuals to only pay a smaller amount for a late payment penalty.
One of the best tax tips or tax advice for those thinking of investing is to invest on growth mutual funds and growth stocks. The frequency of selling and reinvesting determines how much money is kept invested in the market; the fewer occurrences of reinvesting and selling stocks, the more money for the investor. Long-term capital gains also have lower taxable rates compared to short-term ones as well as in dividends and interest. Make sure that the federal tax return numbers from the 1099s supplied by the broker or investment company matches with the ones being filed.
If in possession of stocks, a great tax advice is to use it to donate in charitable institutions rather than using cash. Don’t sell the stock before giving it to charity. Just donate it as it is. By doing this, a full value of the stock can be used as a charitable deduction on the taxable income.
For those starting up a business, one of the best tax tips or tax advice is to choose LLC (Limited Liability Company), which blends partnership or single proprietorship and corporate structures, which allows owner’s financial liability limited to a fixed sum. Shareholders in a LLC aren’t personally liable for debts incurred by the company. This will also allow limited partnership taxation.
If belonging to the 27% federal tax bracket or higher, as an employee, take advantage of the different plans and other tax-free benefits offered by your company such as dependent care programs. This gives a federal tax credit of 20% of child care expenses. Programs like this allow bigger tax benefits that will equal the federal tax bracket a person falls under.
With changes in the federal tax code, there will always be tax questions for different tax problems. But, fear not. Free tax advice is available online or from local IRS agents.