According to Consumer Advocate Eleanor Blayney, CFP®, the majority of Americans don’t pay adequate attention to their taxes. In their minds, everything is okay as long as there is a return. However, simply preparing a tax return is not enough to reap full benefits.
“If Americans broadened their focus, they could discover savings in their tax returns that go well beyond last year’s refund.” Blayney suggests five strategies for Americans to use when dealing with their taxes:
- Manage Total Income – Some sources of income are discretionary in nature. Individuals have partial control over the amount, timing, and taxable nature of income. Portfolio allocations affect the amount of dividends and taxable interest. Realization of investment capital gains and losses can be controlled as well. Retirement plans, such as an IRA, allow control over the amount taken until a person reaches the age of 70½.
- Be Aware of AMT – Familiarize yourself with the thirteen allowable tax adjustments and allowances that can put you at risk of paying the AMT (Alternative Minimum Tax).
- Time Tax Deductions Appropriately – Some deductions can be delayed or accelerated, allowing them to be applied when it is most beneficial to you.
- Increase Certain Taxable Income – Having very little or no taxable income may be a sign that the person is overlooking a chance to identify more income with small tax impacts. In other words, if you have low taxable income in a given year, you’re going to have a low income tax rate, so it might be a good time to add income (such as from a retirement account) to your return as it will be taxed at a lower rate.
- Lower the Refund to Total Income Ratio – A large return is not always a good return. If the ratio is above 10 percent, it’s most likely time to adjust estimated payments or withholdings to reduce the ratio.
If you have any questions, do not hesitate to speak to a CFP® professional.