Your Mid Year Checkup: Lowering Your Taxes
Are you still owing the IRS in taxes every year? Not a great situation to be in, is it? But there is still hope for this year. You have almost six months, in some cases a little longer, to make certain you owe less tax, and possibly no tax, next year.
Consider a Home Office Deduction Many taxpayers have avoided the home office deduction because it has been regarded as a red flag for an audit.
If you legitimately qualify for the deduction, however, there should be no problem. You are entitled to write off expenses – such as rent, utilities, insurance, and housekeeping – associated with the portion of your home where you exclusively conduct business.
A middle-class taxpayer who uses a home office and pays $1,200 a month for a two-bedroom apartment could easily save $1,200 in taxes a year. People in higher tax brackets with greater expenses can save even more.
Organize your Records Good organization may not cut your taxes. But there are other rewards, and some of them are financial. For many, the biggest hassle at tax time is getting all of the documentation together.
How do you get started?
- Collect receipts and information that you have piled up thus far.
- Group similar documents together; putting them in different file folders if there are enough papers.
- If you have time, enter the amounts from all these documents into a computer program or tax software for quick totals and make a printout for your tax preparer.
You can expect savings of $300 to $400 with your tax preparer and hours of your time. Plus, you’re likely to sail through an audit – with fewer assessments and penalties – if you have documentation on hand.
Contribute to Retirement Accounts If you haven’t already funded your retirement account, do so by April 15. Making a deductible contribution will help you lower your tax bill. Plus, your contributions will compound tax-deferred. Your savings will vary. If you are in the 25% tax bracket and make a deductible IRA contribution of $3,000, you will save $750 in taxes the first year. Over time you will save thousands, depending on your contribution, income tax bracket, and number of years you keep the money invested
Find a Tax Advisor Did this year’s tax season feel like a never-ending nightmare of tax forms and a huge tax bill? Then now is the time to take another look at last year and plan for the current tax yea
First look back at the process you went through in compiling your returns. Do you have a huge tax bill or tax refund? Was your tax preparation software helpful? Did your professional tax preparer meet your needs? Any good preparer should save you at least as much as the fee they charge.
You may also gain valuable advice on how reduce your taxes for the coming year. But don’t wait until the last minute. Ask friends and family for recommendations. Ask about credentials and professional designations.
Difference Between Enrolled Agents and CPA’s
There are two designations to look for in a tax preparer. Enrolled agents (EAs) have passed rigorous IRS exams and are certified to represent clients in tax court. CPAs, or certified public accountants, have also passed several examinations and are licensed to practice by the state.
Interview your top candidates to see if you feel comfortable with them. Do they have the expertise for your specific situation? And will they be available for questions after tax season is over. When you first meet to talk about your taxes, be prepared to talk about your personal life. Your preparer isn’t just being nosy. Personal details can have important tax implications. Are you planning to get married or divorced? Are you looking to buy a house? Such life events show up on your tax return as dollars and cents.
Savvy overseeing of your financial books will enable you to build a life and/or company that thrives. And it’s literacy that enables you to do that.
About the Author
Dorothy J. Griggs, EA is an established tax and business accountant who specializes in showing taxpayers how to take advantage of every tax deduction legally allowed.
How can I lower my taxes before the end of the year?
Either research or ask a tax preparer what deductions you qualify for Such as tax credits and all available expense related deductions. You could also make a tax deferred contribution such an IRA contribution.
What expenses can I write off as a home office deduction?
All general expenses such as vehicle use, utilities, and rent which are based on the percentage of your homes used for business. Depending on your occupation there may be many other deductions therefore you should do additional research or consult a tax professional.
How do I find a qualified tax advisor for my specific situation?
Naturally you’ll want to do your homework and look for a tax expert who has the appropriate qualifications, such as a valid PTIN (Preparer Tax Identification Number) and a state license if required.
Here are the Different Types of Tax Pros
Enrolled Agents (EAs):
Enrolled agents are authorized to represent taxpayers before the IRS. They are required to pass a comprehensive 3-part exam about personal and business taxes.
- Pros: EAs specialize in tax law and can provide expertise on tax matters.
- Cons: EAs may not have the same level of training in accounting or financial planning as CPAs.
Certified Public Accountants (CPAs)
Licensed professionals who have passed the Uniform CPA Exam and meet other state-specific requirements. In additional, they are trained in accounting and taxation, and may also have expertise in financial planning and business consulting.
- Pros: CPAs have a wider range of skills and tend to have a more comprehensive approach to tax planning and preparation.
- Cons: CPAs may charge higher fees than EA’s or general Tax Preparers.
Specializing in tax preparation but may not have a specific professional designation or license. Generally proficient with tax preparation software, they may work for a tax preparation firm or independently
- Pros: Tax preparers may be less expensive than EAs or CPAs.
- Cons: Tax preparers may not have the same level of expertise or training in tax law.
Look for a tax professional who has experience working with those in your industry or familiar with your specific tax needs. Check online reviews and get real references to verify their track record.
DO you need more comprehensive services such as tax planning, business consulting, or audit support? Make sure the tax expert you choose offers the services you need.
Compare the fees charged by different tax individuals and firms alike. Make sure you understand how their fees are calculated. Some charge a flat fee, while others charge an hourly rate, or even a percentage of your refund.
Here are 3 more Important Things to Consider:
- Pros include extensive knowledge of tax law and can represent you before the IRS.
- Cons include a potentially lesser range of skills compared to that of CPAs.
Certified Public Accountants:
- Pros: Broader range of skills and ability to provide a more comprehensive approach to tax planning, the sale of assets, business as well as estate planning.
- Cons : more expensive
- Pros: Usually have the lowest fees
- Cons: Potentially far less knowledge of tax law
Ultimately, the best tax preparation specialist for you will come after you do your homework based on your individual needs and preferences. Be sure not to rush and to ask lots of questions. Then you will find a specialist who is a good fit for you.