Top Five Moves To Save Tax Money

With the tax changes news this January, it is very important to take all the necessary steps to protect your finances from the tax man

. With Congress having declared to make the tax changes it is expected that estate taxes will shrink and tens of tax breaks will come to an end. It is expected that Americans will pay higher taxes than the previous year and on an average the tax bill of the household will increases by almost $3500. Therefore it is important to focus on tactics that are sure to trim the tax bill:

1. Feed the 401k: The best known way to save on taxes is to start savings based on the 401k or any other employer based retirement plan. The money which is contributed towards the saving plan can help reduce taxable income therefore reducing your tax bill.

2. Try to safeguard the refund: The amount of money deducted from salary should match the tax calculated while filing for taxes in an ideal situation. But, this rarely happens. There are many researches which show that 75% of US tax payers are dependent on tax refunds. Isnt it a good idea to get the refund when you want it and not wait for the year end? There are risks like identity theft and stealing of refunds with fat tax refunds.

3. Penalty-proof the refund: If you expect to owe money when you file for taxes, to do away with the underpayment penalty, you can simply boost your withholdings. You can definitely evade penalties by paying 90% of what you owe. You can also avoid the penalty by pre-paying 100% of the last financial year tax liability.

4. Plan the itemized deductions well: You might also want to postpone your charitable gifts for a little while. This even is dependent on your personal situation. It becomes all the more important to look out for deductions if youre expecting your income to drop or if you have retirement plans. The high-income tax payers can lose up to 80% of their itemized deductions if the Congress fails to act. It is also a good idea to pay for expenses in 2013 like your January mortgage, state income tax and other real estate taxes.

5. Change the IRA to Roth: It is very important to convert IRA to Roth in the present situation. Withdrawal from the IRA is taxed at the ordinary income tax rate whereas withdrawals from Roth are penalty-free and tax-free if you are 59 years and 6 month old and also if the converted account is five years old. Also, you are required to pay tax of any contributions or pre-tax earnings applicable to IRA for the year you convert it to Roth. If youre afraid that you might be paying higher tax rates if the IRA lowers its rate of tax, you can always convert back to IRA.

These six tips that we brought to you will definitely help save a lot of money paid in tax without too much trouble. Also, it is best to seek advice from some professional tax experts to understand the situation better and know more on how and where to save on taxes.

by: srp

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