Most of us assume that our mortgage or rent, student loans or child care costs eat up the majority of our income, but our biggest expense is taxes. These tips will help you save when the taxman cometh.
Most of taxpayers assume that the mortgage, rent, student loans or child care costs take the largest bite out of income. But the truth is that taxes are our biggest expense, according to John Vento, CPA, CFP, and he offers tips on ways to save this tax season.
After decades of experience as a Certified Public Accountant and a Certified Financial Planner, Vento knows exactly what it takes to sustain and build wealth in today’s no-guarantee financial environment. Most importantly he knows how to employ current tax facts and strategies in order to save hundreds — perhaps thousands — of dollars every year.
“Most people think their biggest expense is their mortgage or rent or their kids,” Vento, president of his New York City-based CPA firm, John J. Vento, CPA, P.C., and Comprehensive Wealth Management, Ltd., as well as the author of the new book Financial Independence (Getting to Point X): An Advisor’s Guide to Comprehensive Wealth Management, said in a statement.
But the reality is that most of a person's money goes (and will continue to go) to taxes.
“There’s your federal and state income taxes," he explained. "Social Security taxes. Payroll taxes. Sales taxes. Property taxes. And on and on. In fact, if you take a close look at how much you pay for various taxes, chances are this number would be more than 50% of your overall expenditures. And while no one can avoid taxes completely — not legally anyway — there are almost certainly ways to reduce your bill that you aren’t taking advantage of.”
If you want to change your taxes from your biggest expense to your biggest saving opportunity, take a look at a few tips from Vento.
Find a trusted financial advisor
Everyone needs a trusted advisor whose primary goal is to help you achieve your long-term financial goals. Although many people just assume financial advisors are for “the super wealthy” or that your stockbroker or tax preparer can also fill this role, Vento said that's not the case.
Before meeting with your advisor, make sure that you're prepared. According to Vento, you cannot expect to have a wealth-building experience if you only have your W-2 and a few receipts.
“Tax records, such as records of income received, work-related expense reports, medical expense information, information about home improvements, sales, and refinances, and so on, should be carefully kept on a year-round basis — not thrown in a drawer or shoebox and then hastily assembled just for your annual tax appointment,” Vento
. “Without tax records, you can lose valuable deductions by forgetting to include them on your tax return, or you may have unsubstantiated items disallowed if you are audited.”
Retro-file to take advantage of missed deductions
although many don't even realize it
Taxpayers can actually use their taxes as a way to actually save money, . Chances are high that you’ve missed out on potential savings in the past hose savings aren’t lost forever.
Get credit for your kids
Child care, tuition payments, 529 plan contributions, etc., are all expenses related to your kids. And all might help save you money on your taxes if you keep track of everything properly.
“Ask your tax preparer to explore every tax credit that might be available to you, such as the child care credit, child tax credit, and the earned income credit,” Vento explains. “For older children who are in college, you must consider the education tax credits, such as the Lifetime Learning Credit and the American Opportunity Tax Credit."
Know what gets taxed and what doesn’t in regard to insurance payouts
While the cost of personal homeowner’s, automobile, boat and umbrella liability insurance generally are not tax deductible, the insurance reimbursements to the extent of your loss
will not be taxed. If you receive an insurance reimbursement as a result of damage to your home or car (as long as it is not in excess of your adjusted basis), it isn’t taxable, Vento said.
Retire from a big tax burden
With a $6.6 trillion retirement savings gap, it's no secret that many Americans aren’t saving enough for retirement. Even older Americans report they have only saved a third of what they'll need. And while it may be years off for younger Americans, they should consider maxing out retirement contributions no matter how far off their golden years are. Not only is it better to start saving earlier, but retirement saving is a great way to reduce the amount you pay in taxes.
If your employer offers a 401(k) plan, invest as much as it will allow, Vento recommended, has this allows you not only to defer tax on your salary but also get a tax-deferred buildup of earnings until you start making withdrawals during retirement.
Other retirement saving options include IRAs, which are available to all wage earners at any salary level, as well as to nonworking spouses.
Give a gift
Eventually, you'll lose some of the value of your estate to taxes, but you can avoid that by taking advantage of gifting strategies. For 2014, you can give $14,000 per year per person without that money being subject to the gift tax or included in your taxable estate. Furthermore, it will not be added back to your lifetime exemption (which in 2014 is $5,340,000 million), according to Vento. And if you're married, your spouse can also gift $14,000, bringing your joint total of tax-free gifts to $28,000 per year per person..
“Paying taxes doesn’t simply have to mean kissing a large portion of your hard-earned money good-bye,” Vento said. “When you understand how they work and know where to look for opportunities, you can actually minimize your tax payout, and as a result, save a lot more of your money. Those savings can then pave your way to financial independence.”