How to Pay Less Taxes

What is Tax Planning?

Tax Planning is the creative process which allows you to take advantage of all the tax tools and options at your disposal between now and December 31 to help you reduce your taxes by April 15 of next year.  

There are two parts to tax planning, and they both save you money on taxes:

1. Tax Deductions, which reduce your taxable income, and
2. Tax Credits, which reduce your tax liability.

Why Plan Now?

• Maybe you don't want to worry about tax planning because your living situation has not changed from last year.
• Maybe you don't want to spend the time to plan because your tax return is not due until April 15, of next year.
• Maybe tax planning just bores you! But a little planning now can save you money next year-- and we all like saving money!
• Tax planning should really take place all throughout the year, but it is not too late to start.
• Even though your tax return will not be submitted until April of next year, you only have until December 31 of this year to qualify for any tax deductions and tax credits. Take action now to claim deductions and credits on your next tax return and have your best tax year ever!

Tax Preparation and Planning Checklist

eFile.com has compiled a tax preparation and planning checklist of important tax records and documents that will make it easier and faster for you to prepare and efile your Federal and State Income Tax Returns. Before you continue on to the next steps of the tax planning process, you may find it convenient to review and print this eFile tax preparation checklist.

 

How to Begin Planning Your Taxes in 3 Easy Steps:

Tax Planning Step 1: Check your paycheck withholding!

Are you expecting a tax refund? Almost 100 million (or 75%) of all Americans got a tax refund check in 2007 (the last year for which data was available), and the average refund check was for about $2,400. So why not get some of this refund now, as part of your regular paycheck? Every month most taxpayers pay an average of $200 too much in taxes. To find out how much you should be paying in taxes each paycheck, use our TAX WITHHOLDING CALCULATOR.

Are you already getting money form the Making Work Pay Tax Credit in your paycheck? Employers who withhold taxes should have already adjusted your paycheck to begin disbursing the money, and you may notice that your paycheck is a little bigger than it used to be. However, if you are self-employed or your employer does not withhold taxes, then you should remember to claim the credit on your tax return. Don't worry, the efile.com tax software will generate the form for you automatically!

Tax Planning Step 2: Use the efile.com FREE TAX CALCULATOR to estimate your taxes!

Where can you find your estimated income? If your income has not changed from last year, simply begin by entering the information from last year's W2 into the efile.com FREE TAX CALCULATOR. Alternatively, you can use the year-to-date income from your latest pay stub to estimate your expected annual income for the year (keep in mind that the tax calculator is based on the tax tables from Tax Year 2009).

Tax Planning Step 3:

Keep records! Which records? Well, the IRS recommends that you keep all tax-related records for 3 years in case of an audit. But some old tax documents, such as last year's W-2's, can come in handy when you are filling out your tax return this year.

Here are some examples of tax-related documents to you might want to keep:

• W-2 forms
• Pay stubs for the year
• Mortgage payment stubs and/or home purchase closing statement
• Last year's tax return (for quick reference and comparison)
• Receipts from anything you might claim as an itemized deduction 
• Receipts from any charity (e.g. for church tithes, disaster relief donations, etc.)
• Car mileage log (in case of business use)
• Any receipts for business travel expenses
• Cancelled checks (especially for IRA contributions and other deductions)
• Credit card statements and bank statements (to verify any deductions)
• Medical bills (especially if they exceed 7.5% of your income)
• 1090G form (for deducting state or local income taxes) 
• 1090 forms (from any dividends or other income paid to you) 
• Mobile phone bills (especially if you made charitable donations by text message)  

TIP: To make your mountain of documents easier to store, try scanning them and keeping them as pdf files. This way you can print them out if you need them. If you do this, remember to back up your computer!

For more information about tax recordkeeping, consult IRS Publication 552, Recordkeeping for Individuals.               

Important! Remember to use our TAX CALCULATOR to evaluate different income, tax deduction, and tax credit scenarios.

8 Great Practical Tax Planning Tips:

1. Keep records for at least 3 years in case of an IRS tax audit. EFILE TAX TIP: For your own peace of mind you might want to keep them longer. Start a file folder at the beginning of each year, and put all of your receipts into it.
2. Check your pay stubs against your W-2 to make sure they add up. Even employers can make mistakes!
3. Study last year's tax return. Are there any credits and deductions which you are you still qualified to take? Are there any you did not take, but for which you now qualify? 
4. Deduct the cost of last year's tax preparation. Next year you will deduct any fees paid for the preparation of this year's tax return. Also deduct the cost of any tax-related consultations, seminars, books, or newsletters, etc.
5. Donate to charity! The IRS only requires receipts for charitable contributions of $250 or more, but it's a good idea to keep receipts for any donation.
6. Make long-term investments. Short-term investments are taxed normally, but those held for over a year are taxed at only 15%.
7. If you have planned your taxes successfully enough to receive a tax rebate, you should invest it in an Educational Savings Account, an IRA, or a savings account at your bank. Use the money to start preparing for next year's taxes.
8. You don't have to take the standard tax deduction. Use our TAX CALCULATOR to itemize your deductions, then see whether the resulting amount is higher than the standard deduction available to you. Choose the higher amount!

 

eFile Top Tax Savings Suggestions:

Deduct the cost of working or doing business:

Do you pay for parking at work? You may be able to deduct $230 per month you paid for parking at work in 2009.

Do you use your car for business? You may be reimbursed for business use of your vehicle (not including commuting) to the amount of $0.55 per mile.

Do you car pool with others to work? If you operate a non-profit car pool, any payments your passengers make to you are considered reimbursements of your expenses and may not have to be claimed as income.

Do you ride a bicycle to work? It's good for the environment, your health, and your wallet! You may get $20 per month in which you used your bicycle to go to work. You may also be reimbursed for the purchase price as well as the costs of maintenance, repairs, and storage.

Have you gone on work related trips? If you keep your receipts, you can deduct the cost of travel expenses, baggage handling, lodging, meals, business phone calls, and even dry cleaning.

Have you lost your job? Changed jobs? It costs money to look for a new job, and you may be able to deduct these job search related expenses.

Did you collect unemployment compensation?  Up to $2,400 in unemployment compensation may be excluded from your taxable income. 

Did you move to be closer to work or to take a new job? If your new residence is 50 miles closer to your workplace than your old home, you may qualify for a deduction of your moving expenses.

Do you work from a home office? You may be able to deduct certain expenses, such as internet and cell phone service, furniture, insurance, and security.

Do you make a low income? The IRS has stated that only 75% of families who qualify for the Earned Income Tax Credit actually take it. See if you qualify, and don't miss out.

Do you serve in the armed forces? Thank you for your service to our country. You may be able to take advantage of several tax breaks for military personnel.

Do you belong to a union? Union dues and initiation fees are deductible.

Do you make retirement savings plan contributions? Learn more about the Saver's Credit.

Did someone say stimulus money? Look at these government sponsored programs!   

Did you buy a car in 2009? (There are still money-saving options available before Dec. 31, 2009!) The Cash for Clunkers Program has expired, but there is still time (between now and December 31) to save money! You may be able to deduct the sales tax on $49,500 of the vehicle's purchase price. Light trucks, motorcycles, and motor homes may also qualify.

If the car you bought (or are going to buy) is a hybrid, you can save even more! Find out how you might qualify for up to $3,000 with the Alternative Motor Vehicle Credit.

Did you buy a home in 2009? You may qualify for a fully-refundable tax credit of up to $8,000 with the First-Time Home Buyer Tax Credit. You are still considered to be a first-time buyer if you haven't owned a home in 3 years. If you have previously owned a home for at least 5 consecutive years but are now buying a new one, you may qualify for a tax credit of up to $6,500.

Did you improve your home with energy-efficient appliances, windows, doors, or other energy saving devices? Even if you haven't yet, it's not too late to save up to $1,500. You have until December 31 of 2010 for qualifying products to be placed in service (installed and ready for use). You can make the purchase now and still claim the credit on your 2009 tax return.

Family-Friendly Tax Savings:

Do you have children or other dependents? You may qualify for $1,000 per dependent with the Child Tax Credit.

Did you adopt a child in 2009? There is a special tax credit for which you may qualify.   

Are you a student or the parent of one? If so, you have a choice of credits. You may be able to receive up to $2,500 per student.

Did you get married in 2009? Congratulations! There are several tax-related implications which you should know about.

Did you get divorced in 2009? As with marriage, there are several tax-related implications in cases of divorce or separation. For example, alimony is deductible.

Did you spend money on medical care? Most people did, of course. But if you had a particularly tough year, you may be able to deduct any medical expenses which exceed 7.5% of your income.

Do you employ your child in a family business? If you hire one of your children who is less than 18 years old, you may not have to withhold taxes from their salary for social security, Medicare, or unemployment.

Other Tax Savings Tips you should not overlook:   

Did you gamble and win? Lose? Whether you play poker or the slots, all gambling winnings must be reported as taxable income. However, gambling losses may be claimed as deductions, up to the amount of your winnings. Winnings and losses must be reported separately.

Did you rent a safety deposit box? If you use it to store stocks, bonds, and other paperwork for investments which produce taxable income, then you may be able to deduct the cost of rent.

Some legal Tax Loopholes: Tax-free income!

Looking for a pay raise but not more taxes? Here are several costs your employer can pay without you owing any new taxes:

• $5,250 for education (whether work-related or not)
• $120/month for public transportation
• $230/month for parking
• The cost of a bicycle (if used to commute)
• Health insurance premiums
• Term life insurance premiums

Additional information about tax-free income

Here are some expenses which you may NOT be allowed to deduct:

• Commuting expenses
• Health Spa membership fees
• Political contributions
• Campaign expenses
• Brokers' commissions
• Meals while working late
• Lunch with co-workers (except while traveling)
• Professional accreditation fees
• Club dues
• Life insurance premiums
• Personal disability insurance premiums
• Burial and funeral expenses
• Personal legal fees
• Fines, such as parking and speeding tickets
• Interest on car loans
• Capital expenses
• Check-writing/ personal checking account fees
• Home repairs, insurance, and security
• Fees for licenses, such as marriage and pet ownership
• Lost or misplaced cash or property
• Relief fund contributions
• Residential telephone lines
• Wristwatches (even if necessary for work)
• Voluntary unemployment benefit fund contributions
• Lost vacation time or unpaid wages
• Expenses of earning and collecting tax-exempt income
• Expenses of attending a stockholders' meeting   

More details about expenses you may not be able to deduct

Charity Pays!

Turn Your Kindness into Cash Back:

Do you donate to charities or religious organizations? Whether money or goods, you can deduct the value of your donations. Be sure to get receipts for anything worth over $250.

Have you used your vehicle for charity? You may be reimbursed $0.14 per mile driven in service to a charitable cause.

Have you given disaster victims a place to stay in your home? You may be able to receive a tax credit of $500 per person, for up to four people, for a total credit of up to $2,000.