How to Pay Less Taxes - Tax Planning Tips for 2011 and 2012

2010 Tax Calculator

What Is Tax Planning?

Tax Planning is taking advantage of all the tax knowledge and tools at your disposal before December 31 in order to estimate your income taxes, qualify for the right credits, deduct the most expenses, and ultimately to reduce your taxable income and pay less taxes. Plan your taxes now and save money at tax time.

There are two main ways to save money by paying less taxes:

Tax Deductions, which lower your taxable income, and
Tax Credits, which lower your taxes dollar-for-dollar.

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.com tax preparation checklist.

Avoid Surprises, use the FREE 2012 Tax Calculator and Tax Estimator

Free 2012 Tax Calculator

How to Begin Planning Your Taxes in 3 Easy Steps:

Tax Planning Step 1: Check Your Paycheck Withholding!

Do you want your tax refund in your paycheck? Recent IRS statistics show that almost 100 million (or 75%) of all Americans get a tax refund check, and the average refund check is 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 income taxes.

To find out how much in taxes you should be paying each paycheck, use our WITHHOLDING CALCULATOR.

Tax Planning Step 2: Use the efile.com FREE 2012 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 efile.com tax calculator is based on currently available figures which may be subject to adjustment).

Tax Planning Step 3: Keep Tax 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
Canceled 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:

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.
Check your pay stubs against your W-2 to make sure they add up. Even employers can make mistakes!
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?
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.
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.
Make long-term investments. Short-term investments are taxed normally, but those held for over a year are taxed at only 15%.
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.
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 Tips:

Deduct the Cost of Working:

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

Do you use your car for business? You may be reimbursed for business use of your vehicle based on miles driven.

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 be reimbursed for the purchase price of a bicycle 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 move to be closer to work or to take a new job? If your new residence is at least 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? See if you qualify, and don't miss out on the Earned Income Tax Credit.

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? You may be able to get a tax credit for your qualified contributions.

Home and Car Tax Savings:

Did you buy an electric car in 2011? If the car you bought in 2011 is a plug-in hybrid or fully electric vehicle, you could qualify for a tax credit of up to $7,500.

Did you improve your home with energy-efficient appliances, windows, doors, or other energy saving devices? You may be able to deduct up to $500 for the expenses, or even more for installing renewable energy sources.

Family-Friendly Tax Savings:

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

Did you adopt a child? There is a special refundable tax credit for which you may qualify. The credit can reimburse up to $13,360 of qualified adoption expenses.

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? Congratulations! There are several tax-related implications which you should know about.

Did you get divorced? As with marriage, there are several tax-related implications in cases of divorce or separation. For example, alimony is deductible while child support is not.

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.

Want even more tax savings? Find more tax reduction and tax planning tips.

Some Legal Tax Loopholes: Tax-Free Income!

Looking for a pay raise but not more taxes? Assistance in the form of money or services is considered income. Here are several examples of expenses that can be paid or reimbursed by your employer without burdening you with any new income taxes:

$5,250 for education
$5,000 for child care assistance
Adoption assistance and reimbursements
$230/month for public transportation
$230/month for parking
$20/month for using a bicycle to commute
Health insurance premiums
Group-term life insurance premiums
Health Savings Account contributions
Athletic facility privileges
Meals provided at the workplace
Retirement planning services
Worker's compensation
Welfare benefits
Gifts, bequests, and inheritances
Court-awarded compensatory damages
Cash rebates from dealers or manufacturers

More examples of tax-free income

Be Careful: Non-Deductible Expenses

If your employer provides you any of the following, it will generally be considered taxable income. Furthermore, these expenses do not qualify as deductible:

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 for marriage
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 you contribute money or goods, you may be able to deduct the value of your donations. Be sure to get receipts for any donation worth over $250.

Have you used your vehicle for charity? You may be reimbursed a certain amount per mile driven in service to a charitable organization.