Wednesday, March 16, 2016

New to paying taxes? Here are tips to get started

If you are filing your taxes for the first time, or just haven’t figured out this confusing process yet, here are some things to know:
1.You might not have to file. If you earned less than $5,700, or less than $9,350 and are claimed as a dependent, you don’t have to file. But if you have unearned income (from interest or dividends) of more than $950, you have to file or your parents have to put it on their return.
2. How to file. If you earn less than $62,000, you can file for free here: You can also find other free or cheap tax software and many tax preparers will review your filled-out tax forms for free. Colleges also often have free tax assistance. What forms are you filling out? Well, you can use a 1040EZ (which is ea-sy, get it?), but because it’s short, it doesn’t allow for all deductions. The 1040A allows for a few more deductions and credits. And Form 1040 is for complicated returns with a lot of deductions.
3.The goal is to not get a refund. Counterintuitive, right? But why do you want to give the federal government interest-free money during the year? Don’t withhold taxes if you don’t have to, write “EXEMPT” on your W-4s if you don’t expect to pay any taxes, and take the time to write down expected deductions and exemptions when you fill out W-4s.
4.Don’t just use the standard deduction. Make sure it’s really better than the itemized deduction by trying to itemize first. Because you need to hit a minimum expenditure to qualify for deductions, increase deductions by lumping miscellaneous expenses into the same year, and keep track of volunteer hours, trips to doctors, etc. Often overlooked deductions include state and local sales taxes, child and dependent care, and job search expenses.
5.Take advantage of your education. Student loan payments are often deductible. How much are your parents claiming? Do they have a deductible 529 college savings account? Look into the Lifetime Learning Credit and the American Opportunity credit.
6. Save for retirement. Yes, you should start worrying about it now, even though you’re young and hip and are planning to be a billionaire by 60. Some of the most tax advantaged investing strategies are 401(k)s, IRAs, and life insurance.
7. Plan ahead during the year. Make copies of receipts and think about tax planning ahead of time. What investments do you want to make? When should you make them? Can you lump a bunch of random expenses into the same year? Can you offset gains with losses? If you want to spend money on help, hire a tax planner at the start of the new tax year, not at the end. So do that now.
8.Think about stocks and bonds. How does Larry Ellison, the head of Oracle Corp., pay very little tax on his obscene amounts of wealth? It’s all in stock. For some reason, the tax code prefers stocks. It taxes stock gains at a lower rate. If you take loans against your stock, that’s tax-free. And if you eventually leave it to your eventual children, they don’t pay tax on any gains on that stock. Quick tip: Keep tax-inefficient assets like taxable bonds, high-turnover stock, mutual funds, or real estate in tax-deferred annuities, 401(k)s, and IRAs. And offset stock gains with stock losses.
9.Consider lifestyle changes long-term. Think about changing your life to what Congress apparently thinks the ideal American is, because it gives you tax breaks for it. There are major tax credits for energy saving/hybrid vehicles. Starting your own business at home will let you deduct lots of starting expenses and provide a lot of tax breaks. Become a homeowner and if you have a low interest, keep your mortgage for a long time. It’s deductible, too. Try to get paid in dividends, instead of income, because the payouts are tax-preferred. Donate to charities and make sure to include the value of donated items, like clothes.