2017: The Top Five Smart Ways to Handle Taxes
“American tax laws are constantly changing as our elected representatives seek new ways to ensure that whatever tax advice we receive is incorrect,” once quipped Dave Barry.
Others joke that perhaps the second of life’s two certainties is better.
But whatever you may think of tax time, it’s best just to get it over with.
In fact, as one of life’s two certainties, taxes can be well… the most taxing. But if you’re aware of what you can and cannot do with your money, the better you are.
No. 1 – Never go it alone
Most of us like to do things on our own. We’re stubborn, not wanting to pay an accountant to do what you can do at 11:59 p.m. the night before doomsday (err… tax day). However, taxes are the one area where you should seek the help of a well-versed CPA that’s good at guiding you, especially when it comes to taxes owed on your trades.
No. 2 – Be Aware of Capital Gains and Dividends Tax
When you sell an investment for a profit, you will be taxed. If you sell within the first year you own the trade, you'll pay tax at a rate of about 35%. However, the tax code does encourage longer-term investing. So if you hold for more than a year, it’s 15%. In addition to profits from selling investments, you'll pay tax on interest and any dividends you receive.
For example, let’s say you were in NVIDIA (NVDA) last year, as it exploded from a low of $24.50 to $120 a share. That’s a gain of $95.50. If you held 5,000 shares, you watched your trade balloon from $122.500 to $477,500.
That’s a great win. Hold it for more than a year, and you pay 15% on it. Hold it for months, and you pay 35% of it right to the stuffed wallet of Uncle Sam.
No. 3 – Set up a retirement plan
Once you’ve figured out what you owe, think about how you can save.
By setting up a retirement plan, you can deduct your contributions to IRAs, and 401(k) plans for instance, which can help increase your tax-deferred gains. Of course, there are contribution limits you must be aware of prior to doing this.
Traditional IRAs and 401(k) plans receive pre-tax contributions. Let’s say you have taxable income of $80,000 and you contribute $5,000. You can subtract $55,000 from the taxable income and avoid paying tax on it right now.
No. 4 – Don’t forget your deductions
Be careful with what you deduct. The taxman knows all – another reason to hire a well-versed accountant. A few things to be aware of now though are child tax credits, which offers $1,000 for every child under 17, as well as Child and Dependent Care Credit.
Donate to charity, too. Just be sure to follow the rules and have receipts. You’ll also want to take full advantage of medical expenses, too. If, for example, you had a rough medical year, you may be able to deduct some of it from your taxes.
No. 5 – Just pay it
You may not like taxes, but you have to pay them unless you’d like your life turned upside down and have a “friendly” tax guy showing up at your front door. If you can’t pay it all at once, let your accountant know. Pay what you can and see if you can set up a payment plan – with interest attached, of course – for the remaining amount.
Taxes are never easy, or fun unless you get a refund.
In the end, though, make sure you have a good accountant. It’s not worth the fines or a visit from the taxman.