Preparing for Greater Tax Deductions Next Year

In Part 1 of this series, we looked at 7 year-end tax tips to boost your tax deductions and lower your taxable income. In Part 2 we discussed common, everyday expenses that can be itemized in order to reduce your income tax. Now realizing there are many tax incentives available to you in order to reduce your taxes, we can use this info to plan the year ahead to ensure and even lower tax bill as a result of increased tax deductions. As a result of some simple organization techniques and a few tax-friendly moves, you can increase your wealth by lowering your realized income and therefore keep more of your money.

Plan Your Deductions: Likely there are some expenses you have made in the past that you now realize qualified as a tax deduction. If you find yourself saying, “I wish I had known that before!” remember going forward to make these tax moves throughout the year. For example, remember to max out your IRA and donate items around the house that are collecting dust.

Keep Accurate Records: Creating an organizational system that works for you can boost your income tax deductions substantially. Once you have a filing routine in place, the few extra seconds it will take to organize documents properly will save you hours during tax season, and will ensure that there are not any misplaced or overlooked deductions.

Having a system to track, record and organize your records makes it easier to take advantage of the tax laws. For one, this will keep you mindful of potential tax deductible expenses as you make purchasing decisions. Secondly, come next tax season you will reduce the number of lost receipts and more easily recall all of your tax deductible items.

To keep receipts and records organized:

1. Keep all receipts, records and statements in one central place.
2. Be consistent with how you stay organized and where you keep your records.
3. Distinguish between records you only need for the short-term receipts and those you should hang on to for the long-term in order to reduce the mess.
   • ATM receipts, pay stubs, 401k statements, credit card statements and annual reports from investments are not necessary to keep for more than three months. These are only needed to check for accuracy.
   • Keep receipts for regular purchases just long enough for warranty coverage or to take advantage of return policies.
   • Receipts for major purchases should be saved for the long term.
   • All tax-related records should be kept for six or seven years since the IRS can go back six years to ask for proof of income and receipts.
4. Circle the date and make a note on any records that will be used for tax purposes.
5. Use an organizational system that works for you.
   • You may just need one shoebox to file your records if you do not have too many itemizations and records.
   • If you have quite a bit of paperwork, you will need a more sophisticated filing system to save you or your CPA time at the end of the year. As an example, create a folder or envelopes organized by category. Depending on the breadth of your itemizations, you may want to include more or less labels:
     • Flexible spending account
     • Work/Business related
     • Postage
     • Travel and parking
     • Entertainment
     • Equipment, supplies and services
   • Charitable contributions and donations (remember a receipt or canceled check is required for all cash donations)
   • Investment purchases
   • Real Estate documents
   • Tax preparation expenses
   • Miscellaneous tax deductible expenses

Consider Starting a Part-Time, Home-Based Business: Not only is the unlimited profit potential of owning a business a great way to become wealthy, but some suggest that the tax incentives of being a business owner are what allow the rich to get richer. A low-cost, home-based business is a good way to get started. Here’s why:

1. Everyday, personal living expenses are now business expenses. If you have a legitimate business that you can prove intends to generate a profit, you can write off all or a percentage of: home, car, equipment and supplies, meals, education and entertainment expenses.
2. If your business realizes a loss, you can deduct it from your earned income.
3. If properly scheduled, your travel and vacation can qualify as tax deductible expense mixing some business activity into your trip. Business activities can include attending a conference or researching an investment property.
4. Visit Inc.com Small Business Tax Strategies for more tips and tools.

Become a Property Owner: If you do not own a home, buy one. Mortgage interest alone can greatly reduce your tax bill and drastically cut your actual living expenses annually. Other deductions include real estate taxes, and even some home improvements for medical related situations or improving energy efficiency. In addition, when you sell your home up to $250,000 in profits is tax free if you are single, or $500,000 if you file jointly, as long as you can prove the home was your primary residence for two out of five years.

Millionaire Money Habit: Wealthy people have mastered the art of reducing their taxable income, which allows them to keep more of their money to build even greater wealth. Be aware of all of the tax incentives discussed in Part 1 and Part 2 to make the tax law work in your favor, and keep your records organized in order to efficiently and accurately recall every item come tax season.

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