4 tips to reduce your tax burden this year and every year

FROM MARKETWATCH.COM

We're coming up on everybody's least-favorite time of year: tax season. If you're like most people, you're probably looking to just file your returns and put the issue out of your mind until next year, when it comes time to do it all over again.

That would be a mistake. While filing is a once-a-year event, taxes are something you should be conscious of year-round, to ensure that you're reducing your burden as much as possible. There are a few things everyone can do in order to become better prepared. These steps — which are just a start, as you should talk to your advisor about further measures you can take — will not only make you feel more secure every April 15, but can reduce your tax burden and put your retirement savings on a more solid ground. After all, the less you pay in taxes, the more you get to keep.

Here are four steps that should have an impact.

• Contribute to an IRA. This is likely the first thing any financial planner will advise, on any topic, so you're probably tired of hearing it. Nonetheless, you'd be surprised by how many people who are eligible for an IRA don't contribute to one. But in addition to being a foundation to one's nest egg, IRAs also reduce your taxable income. If you're below the age of 50, you can contribute $5,500 a year — that's money that won't be taxed, and it likely makes up a sizable part of your income. (If you're over 50, you can contribute $6,500 annually.) Over the course of your career, the tax savings from this alone will be significant.
• It's likely that some of your investments rose this past year, while other holdings lost money. If this is the case, you can sell the remainder of your losing investment and reinvest that money back into the market. Selling the holding will allow you to recognize a loss, which can be used to offset taxable gains in your other funds. This process, known as "tax-loss harvesting," can save you up to $3,000 a year, and is a huge benefit of working with a fee-based Registered Investment Advisor (RIA). Your RIA can walk you through the process, ensuring that you have the greatest possible tax efficiency.
• If you generate dividends on non-IRA accounts, make sure that those dividends are qualified dividends. That will allow them to be taxed at a 15% rate — lower than the ordinary income-tax rate. This may seem like a small issue, but it is one where the impact will become very pronounced with time.
• Nobody likes thinking about taxes, but the more you do, the better prepared you'll be each year. Performing a mock tax return in July or August may not sound like fun, but it will give you a clear understanding of where you stand for the year. With that information, you can adjust any withholdings or simply become more tax-conscious, small moves that can become more pronounced with time. If you're caught off guard when it comes time to file, you're not well positioned to fully take advantage of the measures you can take to reduce your burden.