Betty Xiong: 7 Smart Tax Moves That Financially Successful People Always Do

This post is brought to you by CJ Affiliate’s VIP Content Service with sponsorship by Turbo Tax. While this is a sponsored opportunity, all content and opinions expressed here are my own. All tax situations are different.

It’s tax filing season once again, and there are smart tax moves that financially successful people always do.

There are some that you may have already done – or can still do – for 2017.

But for those that can’t be done for this tax year, you can begin positioning your tax situation for 2017 right now.

Here are seven of those tax moves.

Plus don’t miss the exclusive offers that I’ve teamed up with Turbo Tax to bring you. Because whether you’re using a CPA for sorting through it all and filing solo, you should get assistance of some sort.

The IRS tax code is a veritable labyrinth of rules and regulations, so you will need some sort of support in getting the job done right, and with the lowest possible tax liability.

1) Have Adequate Withholding – Not Too Much, Not Too Little

You’ve probably heard that having a big tax refund is like giving the government an interest-free loan. And even though it’s something of a cliché, it’s actually true!

While a lot of people are excited over the prospect of getting a big fat income tax refund, the reality is that you probably have much better things to do with the money. For example, you might invest it to earn even more money.

Or you might use it to pay off a credit card that is charging you double-digit interest rates. Either use of the money would be better than allowing the government to accumulate it with no benefit to you.

In truth, good tax planning is all about coming as close to zero with your tax liability/refund as possible. Though it’s unlikely that you can plan your tax liability/refund to come out to exactly zero, getting to within a couple hundred dollars is an excellent strategy.

Make sure that your withholding or your tax estimates (if you’re self-employed) come as close to your expected tax liability as possible, without substantially exceeding it.

A lot of taxpayers are worried about owing tax, but there’s actually quite a bit of flexibility there. As long as you pay in at least 90% of your actual tax liability, you won’t get a penalty for late payment. Another penalty avoiding strategy is to make sure that you pay in enough tax to cover 100% of the previous year’s tax liability.

Either way, you will have at least most of your tax liability paid, without having to incur IRS penalties for late payment.

2) Make the Largest Retirement Plan Contributions Possible

For most taxpayers, making contributions to a tax-deferred retirement plan is the single biggest and best way to lower your current tax liability. And not only does the contribution lower your current tax bill, but it also enables you to build up investment capital that will earn tax-deferred income for your retirement. In short, it’s the best investment deal available. For that reason, you should take advantage of it to the greatest degree possible.

For both 2016 and 2017, you can contribute to $18,000 into a 401(k), 403(b), 457, or Thrift Savings Plan (TSP). If you are age 50 or older, the contribution can be as high as $24,000.

Over and above an employer-sponsored retirement plan, you can also contribute to a traditional IRA. You can contribute up to $5,500 per year, or $6,500 per year if you are age 50 or older. Even if you are covered by an employer plan, you may still be able to make a tax-deductible contribution to a traditional IRA.

How effective are tax-sheltered retirement plan contributions at reducing your tax liability?

Let’s say that you’re in the combined 30% tax bracket, assuming 25% for federal, and 5% for your state. If you can contribute the full $18,000 into an employer plan, plus $5,500 into a traditional IRA, you will be able to reduce your taxable income by a total of $23,500.

If you have a marginal federal and state tax rate of 30%, a $23,500 contribution to both a 401(k) and a traditional IRA will reduce your tax bill by $7,050!

You can make a tax-deductible contribution to a traditional IRA, if you qualify for the deduction, up until the tax filing deadline (either April 15, or October 15 if you file an extension). 401(k) contributions have to be made by December 31 of the actual tax year, so you can’t change your contributions for 2016. However you can make adjustments now to max-out your contributions for 2017.

3) Make Sure Your Capital Gains are Long-term Gains

The tax code provides a generous tax break for long-term capital gains, in the form of a reduced tax rate. Short-term capital gains, which are gains on assets that have been held for one year or less, are taxable at ordinary income tax rates. Long-term capital gains – gains on assets held over one year – have lower rates.

Long-term capital gains tax rates look like this:

If your ordinary income tax rate is 15% or less, then your capital gains tax rate is zero (I know, not bad, right?)
If your ordinary income tax rate is between 25% and 35%, your capital gains tax rate is 15%
If your ordinary income tax rate is higher than 35%, then your capital gains tax rate is 20%

If you are in the 15% ordinary income tax bracket, and you have a short-term capital gain of $10,000, then you will have $1,500 income tax liability. But if you hold the asset long enough to make it a long-term capital gain, you won’t have to pay any tax on it at all.

The moral of this story is obvious: long-term capital gains good, short-term capital gains bad – at least when it comes to income taxes!

4) A Little Bit of Tax-Loss Harvesting Goes a Long Way

Tax-loss harvesting isn’t a new concept, but it’s gaining popularity now that some investment platforms, such as Betterment and Wealthfront, offer it as a feature as part of their programs. But just about any investor can take advantage of tax-loss harvesting. And it can make a big difference when you are filing your income tax returns.

Tax loss harvesting is basically a strategy in which you sell certain investments at a loss, in order to offset the tax liability created on other investments that are sold for large gains. Since capital gains taxes do not apply to tax-sheltered retirement plans, the strategy is used only with regular taxable investment accounts.

For example, let’s say that you have $20,000 in capital gains on a group of winning investments. You can reduce the tax liability from those gains by selling off other investments that have been falling in value. Those losses will offset at least some of the gains that you made on the stronger investments.

If you have $10,000 in losses, that will cut your taxable gains in half. If you’re in the 25% tax bracket, and the gains are short-term capital gains, then you will save $2,500 in taxes using this strategy.

You may even consider buying back the investments that you sell for tax-loss harvesting at a later date. The IRS does impose “wash sale rules” that are designed to prevent the abuse of tax reduction strategies. Generally, you are not permitted to repurchase the same or substantially identical investment securities within 30 days of selling them. But if you want to buy back the investment, without incurring the wash sale rule, you must defer the repurchase for at least 31 days. But then again, you may just want to use the cash to buy an entirely different investment.

This is another tax strategy that you can implement for 2017, since 2016 is already a done deal as far as capital gains are concerned.

5) Keep Accurate Records of All Deductible Expenses

It’s fairly easy to document major deductions, such as mortgage interest and real estate taxes. But it’s a lot more difficult when it comes to deductions that are made up of small, regular expenditures. Examples include medical expenses and charitable contributions.

You can have dozens of co-pays for doctor visits and prescriptions, and lose track of how many and how much. The situation can be even more extreme with charitable contributions. Though you may have a few large contributions paid by check or credit card, it’s also likely to have a much larger number of smaller contributions, such as contributions in church, or to charities soliciting at your door.

It’s best to have either a spreadsheet where you record all of these smaller expenditures, or at least an envelope or file where you store receipts. If you haven’t done either for 2016, make a New Year’s resolution to begin doing it for 2017. It will make next year’s deductions a lot easier to figure out.

6) Be Sure to Take Advantage of All Available Tax Credits

We’re not going to go into a lot of detail here, except to say that tax credits are always worth taking because they reduce your actual tax liability, and not just your income.

Some of the biggest tax credits available include:

Earned Income Credit
Education tax credits
Child credit
Dependent care credit
Savers credit

There are actually a lot more credits available. It’s not always easy or apparent as to what they are, when you qualify for them, or how much you can receive. That’s why you need to get some kind of help in preparing your tax return, in order to maximize those benefits.

Which brings up the next smart tax move…

7) Use a Comprehensive Tax Software Package

Hopefully, you’re not still doing your taxes manually! And if you can’t afford the services of a CPA, you’re not rolling the dice on a fly-by-night tax-preparation outfit. There is a happy medium, in the form of online software packages. Not only are they a lot less expensive than paid tax preparers, but they will also guide you in taking all of the deductions and tax credits that you are entitled to.

The most popular package is TurboTax. It’s the most popular because it’s the very best available, and comes with a very affordable pricing schedule. It offers four different plans, based on the complexity of your tax situation. The pricing runs from zero on the most basic plan, to less than $100 for the most comprehensive one.

Whether you use a CPA or a tax software package, you should get assistance of some sort from either. The IRS tax code is a veritable labyrinth of rules and regulations, so you will need some sort of support in getting the job done right, and with the lowest possible tax liability.

That’s what making smart tax moves is all about!

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