Plan for the New Year
As we finish this tax year, another one is about to begin. I urge you to take a few moments from your holiday celebrations to scrutinize your current financial situation before the clock strikes midnight on December 31 and we enter 2006. It's important and some practical actions before New Year's Eve could save you hundreds, maybe thousands, of dollars next year.
In my bestselling book, Operation Financial Freedom - The Ultimate Plan to Build Wealth and Live the Life You Want (McGraw-Hill), my Uncle, JW Dicks, and I outline a number of strategies that can affect the amount of taxes you pay next year.
It is critical for anyone developing a proactive tax reduction strategy to know his or her tax bracket. There are two categories that are most relevant to you: effective and marginal. Your effective tax bracket represents the percentage of your total income that you pay in taxes. If you earned $50,000 this year and had to pay $10,000 in taxes, your effective tax bracket was 20 percent.
The marginal bracket is the percentage of your income that you pay taxes on your highest dollar earnings. Our tax system is graduated so the marginal tax rate increases as you earn more money. You need to know about both to develop a clear picture of where you stand.
Find a tax preparer who is taxpayer proactive. If you are going to hire someone to do your taxes, then you should do so because he or she can save you significantly more money on your taxes than you could do on your own.
Make sure you discuss deductions with your tax preparer. Don't be afraid to take deductions that might raise a "red flag" at the IRS. If you can provide a reasonable explanation concerning the deduction, then take it.
You should never apply your refund to the following year's taxes. Even though convenient, you shouldn't take the IRS up on its offer since it will allow the government to use your money for free. You should personally take advantage of every dollar you earn.
Did you know you can greatly reduce the likelihood of being selected for an IRS audit simply by mailing your return as late as possible? Although this isn't a terribly sophisticated tax strategy, it does work.
Make sure you review your general life situation and develop your personal financial goals for the New Year. Whether you are creating your retirement nest egg or saving for your children's education, you need a definitive plan in order to succeed.
Make charitable contributions before the end of the year and max out your IRA contributions. And if you're a business owner, now might be a good time to make an investment in equipment and other requirements to effectively accomplish your daily business routine.
There are literally hundreds of areas that might affect your tax structure and payments. Make sure you consult with your personal tax professional before New Year's Eve so you can get back to enjoying your holidays.
Originally published in the Outspoken e-newsletter.