Ways to Maximize Your Tax Advantages
In general, you also need to maximize your tax advantages by adopting some — and preferably all — of the following practices:
Familiarize yourself with tax laws and stay current on annual updates.
In late December, take time to plan your upcoming financial year to gain maximum benefit. Planning for major expenses by opening health savings accounts, for example, or adjusting exemptions, as needed.
Double-check all itemized deductions to make sure you aren't missing a legal deduction. If you haven't checked past reports in the last three years, take them to a tax consultant for review. You may be able to obtain a refund if any legal deductions have been missed, such as an earned income credit.
Hire a professional accountant or tax consultant (such as seasonal firms that specialize in tax preparation) every year, or at least every two to three years, to make sure you are not overpaying taxes. If your income tax returns aren't complicated, costs will range from $100 to $150 and are well worth the price.
Don't overpay. If you ended up with a large return, you overpaid your taxes in the past year and allowed Uncle Sam to earn the interest that could have been fattening up your savings account. Consider claiming more exemptions on your W-4.
Avoid last-minute surprises. If you underpaid and owed taxes upon filing, consider claiming fewer exemptions or open a savings account allocated to paying taxes upon filing so that you'll earn interest and avoid a last-minute crunch to fund a tax payment.
Keep meticulous records throughout the year. Set up a filing system to accumulate and organize all pertinent documents and receipts. Take time to make notations on receipts and match up receipts with credit card or bank statements.
Acquire a home equity loan for major purchases, such as a car or home remodeling. Home equity loan interest is tax deductible, but it only makes sense when used for a “good debt,” and not when used for disposable goods like clothing, televisions, or vacations.
Pay yourself first! Make contributions to your retirement plan early in the year so that you accumulate interest throughout the year and avoid that mad April 15th dash to the finish line. Waiting until April 15th means you lose fifteen months of interest and appreciation.
Don't report income that is tax exempt, such as gifts (in 2006, up to $12,000 from one person), inheritances (under $2,000,000 until 2008), group life insurance payments deducted/withheld by an employer, and child support payments.
These are just a few of the tips you can use to lower your tax nut, but it is highly advisable to research your particular circumstances and to consult with a tax advisor if you have complicated or confusing questions.