Tax laws are constantly changing and evolving. Therefore, lowering your tax bill involves careful planning and a solid tax strategy. In fact, there is hardly an aspect of your financial situation ― savings, investments, retirement funding, education, real estate, and estate planning ― that can’t be improved by tax strategies. In recent years, historic tax reform has provided significant savings for individuals, families, investors, and businesses. However, many of these opportunities are temporary.
Planning your tax strategy is especially important if your circumstances have changed during the past year. As you begin preparing your taxes, take a look at the front of IRS Tax Form 1040, and think about the life changes you have experienced this year.
Have you married or divorced in the past year?
A change in your marital status will affect your tax planning strategy. Near the top of Tax Form 1040 you must declare your filing status ― single, married filing jointly, married filing separately, head of household, or qualifying widow(er) ― which determines your marginal tax rate (the rate at which your last dollar of income is taxed).
Have you had a child, adopted a child, or assumed caregiving responsibilities?
Taking on a dependent will surely impact your tax strategies. If so, you may need to change the number of exemptions you claim, or the number of dependents you support.
Have you changed jobs, started a home business, or rented out your second home?
There may be over a dozen types of income that you must report, as they apply to your situation.
Have you made payments on a mortgage loan, incurred medical expenses, or donated to charity?
At the bottom of Form 1040, you may list any tax deductions, which is a popular tax strategy for reducing total income to adjusted gross income (AGI).
As you can see, life changes are relevant to planning your tax strategies.
It’s important to remember that timing is critical and planning ahead can make a significant difference. By coordinating your tax strategies with your life changes and other financial planning, you may accomplish a variety of goals ― such as buying a house, paying for higher education, and funding your retirement.