If you are a young professional, tax planning is a difficult task to do. It might even become a source of your anxiety. However, always remember you can prepare well in advance. You can save a huge amount of money with proper tax planning. It is an opportunity for you to prepare for your future. Tax planning means analyzing your finances and preparing accordingly to minimize your tax liabilities efficiently. You may find tax rules complicated. However, you must do some research to understand them, as it prevents you from ending up paying money when you file.
4 Efficient tax planning Strategies for young professionals:
It’s important to do proper planning before making any decision. Now, look at some critical tax planning and strategies before making any financial decision.
Understanding your tax bracket:
It is the first step in tax preparation. You need to understand your current situation to plan for your future. Hence, first, you need to understand your federal tax bracket. The US follows a progressive tax system. It means that people with higher taxable incomes are subject to high tax rates and vice versa. The income tax brackets for federal are 10%, 12%, 22%, 24%, 32%, 35% and 37%. It doesn’t matter which frame you are in; you may not have to pay that rate on your full income. This is because:
- You can subtract tax deductions and hence determine your taxable income. This means that your taxable income is not equal to your total income.
- You won’t have to multiply your tax bracket with your taxable income. The government divides your taxable income into parts and taxes each part at the corresponding rate.
Pay attention to common tax credits and deductions:
Many deductions and credits are available. However, you must be aware of who is allowed to take them. Let’s understand a few of them.
|WHAT IT MEANS
|Costs of adopting a child
|American opportunity credit
|College education costs
|Capital loss deduction
|Losses in stock sales
|Doing charity like giving money, cars, investments, etc.
|Home office expenses
|A part of your mortgage or rent. Your property taxes, utilities, and maintenance are some of the expenses if you work from home
|Undergraduate, graduate, or even non-degree courses
|Medical costs over a certain extent
|The interest portion of mortgage on a primary property
|Property taxes on real estate
|Residential energy tax credits
|Installing energy-efficient things at home
Essential tax methods to avoid paying taxes or reduce your tax bill:
As you know by now, deductions and credits can help you reduce your tax bills. However, a few more strategies will help you with tax planning. Here are a few of them.
Adjusting your W-4 form:
The W-4 tells your employer how much tax they can withhold from your paycheck. They then remit the tax to the IRS on your behalf. You can use W-4 for planning your taxes. For example, if you have a large amount of tax bill when you file, you can prevent it by increasing your withholdings. This will reduce the amount you owe the next time when you file.
Save money in a 401(k):
You can put money in a 401(k) savings if your employer offers this savings and investment plan. It gives you a tax break on the money you put in these savings. The IRS won’t tax you if you put your money directly from your paycheck into a 401(k). You can contribute about $22,500 per year to this account. However, if you are 50 years or older, you can save up to $30,000.
Contribute to an IRA:
There are two major individual retirement accounts:
- Traditional IRAs: Your contributions to traditional IRAs are tax-deductible. However, the amount you can deduct depends on whether a retirement plan and your overall income cover you.
- Roth IRAs: In this account, your withdrawals in retirement are tax-free. Taxes are paid in advance; contributions are not tax deductible.
This savings account helps people to save money for college. You may be unable to deduct your contributions from your federal income tax. However, you might be able to deduct the contributions on your state returns if you put your money in your state’s 529 plan.
Flexible spending account (FSA):
You can use this account to lower your tax bill. Every year, the IRS allows you to deposit tax-free funds directly into your FSA; the yearly limit is $3,050 in 2023. You can use this money for your medical and dental expenses.
Health savings accounts (HSAs):
It is a tax-exempt account that you can use to pay medical expenses. As long as you use them for qualified medical expenses, the contributions and withdrawals are tax-free.
Consult a Tax Professional:
Tax planning is not a one-time activity. Once you start planning, you need to make sure that you take advantage of most tax-planning strategies. It takes work to keep track of all the activities. Hence, it’s beneficial to take the help of a professional. Tax planning is part of your work routine as a business owner. Even if you have enough knowledge about the tax laws, you may miss something. Hence, you can benefit from working with a tax planning expert. You must also remember that the cost of a mistake is much greater and might result in extra taxes and penalties.
You can greatly reduce your tax liabilities and related anxieties by having a good tax strategy. You can plan properly by understanding deductions, qualified credits, and tax-advantaged accounts based on your present financial situation. You can benefit a lot by getting help from an expert.