Strategies for Filing your Taxes

March 17, 2015

At the beginning of each new year, every adult American begins to think about their taxes; how and when they’re going to file them and how much of an income tax refund they can expect. While the primary driver of your tax bill is how much income you earn, there are ways to reduce the amount of taxes you owe.  However you have to know how to manage different aspects to take advantage of potential deductions.

Most Americans know that saving for retirement early on is the best way to prepare for the future. By investing in a retirement account, such as a 401k or IRA, you are saving for the future and allowing your money to grow on a tax deferred basis.  An additional benefit is that contributions to a qualified retirement savings plan will also reduce your current taxable income. It’s important to note that taxes will be paid on these funds when they are taken out during retirement.  However, you may be in a lower tax bracket at that point in time.  By contributing to your retirement account, you benefit in two ways: reducing your current income tax bill and saving for your retirement in an account that grows on a tax-deferred basis.

Although making charitable donations won’t earn you more income, it will help to reduce your income when filing taxes. Charitable contributions can be made by paying cash directly to a charity or by donating securities that have increased in value. When you donate appreciated securities to a charity, you benefit in two ways again:  you can deduct the current market value of the stock and you won’t have to pay capital gains tax on the appreciated securities. It is also important to consider making charitable donations and gifts to reduce the value of your estate. Reducing your estate will result in a reduction in estate taxes.

One further source of potential tax savings can be found in your investment portfolio.  Your investment professional can structure your portfolio to maximize tax efficiency between your taxable and tax deferred accounts.  They can choose securities that best fit your tax situation, and they may also manage long term capital gains and harvest tax losses where appropriate.   These are just a few of the many strategies a person can employ to reduce their tax bill.  Your investment advisor and tax professional can help identify the best approaches for you.
–    Rosanne Auslander, CFP