5 Tax Planning Strategies Everyone Needs

No one can escape taxes, but tax planning strategies make them more bearable.?Preparing for taxes reduces stress and helps you?protect your income.

Not everyone knows where to start with tax planning. It often?hits many people by surprise.

Tax season feels like?a blur of stress for many people. Most taxpayers don’t want to think about?taxes again until the following?year.

Skipping tax planning leads to an infinite loop filled with stress. However, you can break the cycle by spreading your efforts across the year. These tax planning strategies will break the cycle and make taxes less stressful.

1. Determine?Your Tax Bracket

Your tax bracket determines how much you pay in taxes. Higher earners get taxed at higher rates.

Every dollar you make?gets taxed at a set percentage. Here is the current Federal tax bracket breakdown for single filers:?

• 10 percent tax rate from?$0 to $10,275
• 12?percent tax rate from?$10,276 to $41,775
• 22 percent?tax rate from?$41,776?to $89,075
• 24?percent tax rate from $89,076 to $170,050
• 32 percent tax rate from $170,051 to $215,950
• 35?percent tax rate from $215,951 to $539,900
• 37 percent?tax rate for?$539,901 and more?

Filing married or as head of household leads to more favorable tax rates.

Tax rates can change each year. Current rates help you calculate how much you owe.

You may think your salary determines your tax bracket. However, some taxpayers use savvy strategies to lower their bracket without lowering their income.

You can drop to a lower tax bracket with?tax credits and tax deductions. Of the two choices, tax credits offer better savings. These dollar-for-dollar credits?drop your total bill.

Tax deductions reduce your taxable income. You’ll still get closer to a lower bracket, but you’ll save more with tax credits.

Using tax credits and deductions will provide a significant tax shield. You’ll reduce the tax burden on yourself, making it easier to accumulate funds.

Tax Bracket Example

Let’s say you report?$50,000 in taxable income.?How much would you pay? ?We’ll refer to single filer numbers for this example, but you can do this activity for any filing status.

The first $10,275 gets taxed at 10 percent. This adds up to $1,027.50.

The next $31,500?gets taxed at 12 percent. This adds up to $3,780.

Finally, an additional $8,225 gets taxed at 22 percent. This adds up to $1,809.50.

These totals equal $6,617 in federal tax payments. You’ll also have to pay state taxes?which have differing?tax rates and brackets.

Perform state tax calculations the same way we performed Federal tax calculations.?No one enjoys paying taxes, but it’s better to know what you’ll come up against.

2. Save?a Percentage?of Your Income for Taxes

You’ll have to pay taxes no matter what. Instead of scrambling to raise funds, put each paycheck into a tax account. You can take a percentage of your paycheck and save it for tax purposes.

Let’s say you have an average tax rate of 15 percent. For every dollar you make, put $0.15 in a tax savings account.?

This tax savings account will grow with every payment. Allocating funds for taxing purposes provides an extra layer of protection.

A tax savings account is one part of the Profit First Method. Popularized by Mike Michalowicz, this formula helps you effectively distribute your money. The method turns unprofitable companies into profitable ones.

3. Aim for Long-Term Capital Gains

Some tax filers trade stocks. Eventually, they’ll have to report?capital gains and dividend payments.?

Selling stocks in under a year triggers short-term capital gains. These gains get taxed at a substantially higher rate than their long-term counterparts.

While the numbers can change each year, long-term capital gains have more protection. Short-term gains get taxed at ordinary income levels.

A buy and hold approach acts as a tax shield. Investors only pay taxes when they sell, and long-term gains get more favorable treatment.

Trading stocks comes with risks and can get speculative. Even if you see a respectable gain, you’ll get taxed at the short-term capital gains rate.

Before selling shares, check the purchase date. If the one-year anniversary is a few days away, wait before selling. Those extra few days can?save you considerable money during the tax season.

Some investors sell losing stocks at the end of the year to lower their gains. This strategy can save you money during the tax season.?

However, you cannot re-enter the same position within the next 30 days. Doing so would trigger the?wash sale rule ?and negate the deductible.?You can rebuy your shares 31 days later and not become subject to this rule.

Some investors sell their shares earlier than the pack. They’ll sell in early November or late October before other people?get the same idea.

4. Itemize All Of Your Expenses

Tax filers can get a standard deduction. This standard deduction lowers your bill.

However, standard deductions provide minimal savings. You’ll save more by itemizing your expenses.

Itemizing expenses is a way to?track deductions. You can track expenses each month to spread the workload. Taking a one step at a time approach instead of a frenzied finish will prepare you?for tax season.?

Review the most?popular tax deductions ?for ideas. You should itemize all expenses anyway. You never know how much you can save.

Some taxpayers will also qualify for credits. Tax credits reduce your final tax bill.?

5. Plan Well In Advance

Planning in advance gives you more time to think. You can assemble all of your deductibles and income streams.

Gradually assemble the required forms and fill them out. This gradual process reduces your chances of making a mistake.?

Your plans can guide current decisions. Some taxpayers may hesitate to sell assets because of the tax implications.

Low-income years give you the opportunity to sell assets with high capital gains.

Planning in advance will also lower your stress. Tax season will be less painful in comparison to prior years.

Get Help With Your Tax Planning Strategies

Tax planning strategies take the weight off your shoulders. They help you?save money and avoid mistakes.

These strategies only work when they get implemented adequately. You can take a DIY approach to?your taxes. However, professional help can make the tax season easier.

Bennett Financials offers tax planning services, so you are prepared for tax season.?Contact us today ?to get started.