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Understanding the tax system is part of building wealth. My dad started teaching me as a teen how to lower taxes when you run your own business. Certain business expenses are tax-deductible and can reduce your annual bill. Pay what you owe—but not a penny more. Stay current on tax law and possible deductions so you have more to save and invest.
Talk of the “fiscal cliff” was everywhere. In short, it referred to more than $500 billion in tax increases and automatic spending cuts scheduled to take effect after Jan. 1 for fiscal 2013 unless lawmakers agreed on another plan. If Congress didn’t act, many of the tax cuts from the Bush years would expire. That would mean higher federal income taxes for most people, and dividends could be taxed as ordinary income. Past experience suggests some of these increases might be softened, so there’s no need to panic—but with uncertainty ahead, consider these steps to limit a potential tax hit:
– Take capital gains now while rates are lower.
– If you plan to sell a stock or fund at a loss, consider waiting until next year.
– If you control business income or the timing of bonuses, receive the money in 2012 rather than 2013 to save on taxes.
– If you’re older and planning a retirement distribution, take it this year instead of next. (If you’re over 70½, you’ll still need to take your required minimum distribution in 2013.)
– You might want to delay charitable deductions to next year when they could be more valuable; push deductible payments into the following year if possible.
– Contribute as much as you can to workplace plans like a 401(k) or 403(b), or to a Roth IRA—the tax benefit becomes more valuable if rates rise.
Building long-term wealth means paying attention to spending, saving, investing, and tax planning. It can feel overwhelming, but ignoring taxes usually means paying more. Pay only the taxes you owe and use legal strategies to reduce your tax burden.
What are your tax-planning tips and stories?
