Every January, hard working taxpayers receive their W-2 Forms from their employers and set about the task of filing their income taxes.  If you happened to claim too many withholding exemptions on the W-4 Forms you file with your employer. chances are that you’ll end up paying more money to the IRS when you file your taxes.  If you happened to claim too few withholding exemptions you’re likely to end up giving the IRS a portion of your money interest free.  There are several tips to help you avoid paying more or less tax than you actually owe.  Regardless of your age or where you are in the financial lifecycle, try to always look for the best opportunities to avoid or reduce income taxes.  A key part of successful cash management is determining in advance the tax implications of all of your financial activities.

Ideally, taxpayers should claim the number of exemptions that will result in withholding as close to what they owe as possible.  It’s a good idea to review your exemptions once or twice during the year to determine if there have been any changes.  By checking your exemptions in early November you’ll have time to make any necessary adjustments by the end of the year.  A new W-4 form should be completed and submitted to your employer if any major changes have been made such as having a child, getting married or divorced, if you can no longer claim a dependent that you claimed on previous years, or if you received a large refund the year before.  There is a new sales-tax option available, which you can deduct either your state income tax or sales tax, whichever is greater.  This option allows you to deduct the actual state and local sales tax paid if the amount can be substantiated.  This is a great deduction for those in the seven states with no income taxes – Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming – and in the states with low income tax rates such as Tennessee.

Saving money is a state of mind and one that takes many people quite a while to adjust to.  By preparing your own income tax return you may save money, but it’s wise to keep in mind that errors you may potentially make can cost you some of your refund.  By making sure that you know which income tax form to use and checking for errors in your personal information you’ll save both time and money.  It’s wise to consider using tax preparation software as it is more accurate than self-preparation and is much easier to use and understand.  Take the most beneficial deduction possible depending on your circumstances, whether it means using the standard or itemized deduction to get the most out of your refund. 

You can determine which is best by doing the worksheet in your income tax instruction booklet.  Other tips include deducting a percentage of your mortgage interest and utilities if you have a home office as this may be considered as a business expense.  Medical expense deductions may be deducted if your employer takes your health insurance out after taxes and it’s more than 7 percent of your total income.  This includes dental and prescription costs as well.

Some of the easier ways to cut your tax bill include maximizing your pension or IRA contributions.  Also, it’s best to use any flexible spending account dollars by the end of the year or you’re likely to lose the money.  Non-prescription drugs can be paid for through flexible spending accounts, which help eliminates the paperwork from keeping track of all purchases.  If you pay your own real estate taxes, then it’s wise to make any payments, which may be due at the beginning of the year by the end of the previous year.  By also making your mortgage payment, which is due at the beginning of January by the end of December, the home lender will get your payment in the current year and this will add to your deduction.  If you’re contributing to a retirement plan such as a 401(k) or 403(b) plan it’s wise to check with your employer to determine if you’re eligible to make extra contributions.

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