How can i lower my taxes
NEW YORK - One of the saddest laments Dan Pilla hears is from the taxpayer who allows Uncle Sam to over-withhold income tax because "it's the only way I can save."
"This is the world's worst way to save money," says Pilla, a tax litigation consultant who dissects page after page of Internal Revenue Service laws, rules and regulations, and studies all its (bad) habits.
While his work - writing books on taxes, conducting seminars and advising lawyers and tax experts - has involved defining and defending almost every kind of deduction - there is one that especially bothers him.
That is the one in which the taxpayer treats over-withholding casually.
Let's illustrate what happens, he says. "Suppose the individual gets a $1,000 refund. That means $83 a month was loaned interest free to the IRS."
By the time that individual receives the refund in May or June, he or she has paid another five or six months of $83 payments, or $415.
"Here's what you do: Adjust your W-4 to stop the $83 a month withholding and put the money into an Individual Retirement Account or a 401(k) plan.
"By doing this for a full year you will have put $1,000 into your plan, thereby obtaining a $350 tax break.
"Let's add it up. You have $1,000 cash in your tax-deferred plan, you've probably earned $50 on your savings, and you've protected $415 cash from further withholding.
"That makes your total benefit around $1,815, or more that three times the real value of your refund." In short, the over-withholder is wasting rather than saving.
For more strategies on doubling your tax refund and cutting your taxes to their lowest legal level, see my book How to Double Your Tax Refund . You'll find dozens of money saving, tax saving and tax management tips.
How to use affidavits to pay less tax
An affidavit is nothing more than a detailed letter of explanation that is notarized and includes a declaration that the statements are made under penalty of perjury.
The significance of the affidavit with respect to taxes is that it can substitute for receipts or canceled checks in the event other records are unavailable. It is well settled that oral testimony is acceptable as proof of a claim made on a return when the testimony is plausible, believable and reasonable. The affidavit is nothing more than oral testimony presented in the form of a written statement.
A good example of how to use an affidavit is in the case of cash contributions under $50 made to a church or other charity. Bike-a-thons, walk-a-thons, candy drives, cookie sales, church donations, Salvation Army bell ringer donations are all examples of cash contributions that often go unrecorded. A simple log of these contributions along with an affidavit can capture hundreds of dollars in deductions you thought you could not claim.
Affidavits are also the key to being able to conduct an audit through the mail. You simply convert your letters of explanation to affidavits. This can eliminate the need to be present during an examination since all the relevant details are provided in writing. Of course the main advantage of a correspondence audit is that you are never caught off guard and never in a position to respond to questions that are irrelevant in determining the correct of amount of tax you owe.
Dozens of uses of affidavits are discussed in my books The IRS Problem Solver and How to Win Your Tax Audit.
Three Tips to lowering your tax
Lowering your tax can be quite easy and certainly rewarding when you learn a couple of tricks. Following are three techniques I discovered in my research.
most states, property taxes are paid a year behind the year they are assessed. For example, property taxes in Minnesota payable in the current year are really for taxes incurred in the prior year.
In order to double your property tax deduction for this year, be sure to pay this year's taxes before December 31. Now obviously, some people cannot afford to pay property taxes twice in one year. If you can't, remember that funds are usually escrowed with your mortgage payment specifically to pay taxes. At such time you decide to pay additional property taxes, check with your mortgage company to see what your escrow balance for taxes is at that time. Then when you pay the taxes at year end, take the receipt issued by your department of property taxation and submit it to your mortgage company for reimbursement. They must refund your balance when you show proof of payment of the taxes.
This technique is also effective for salesmen who find themselves closing that big deal at year-end, thus experiencing a bit of a windfall. By paying the real estate taxes before January 1, you increase you deductions in the year of higher income. At the same time, this reduces your expenses for the next year, during which your income will probably return to more historic levels. This strategy is a good way to manage taxes for anyone who has up and down trends in their income.
For other examples of how to use this deduction in managing your tax liability order my book Double Your Tax Refund.
No. 2 - Increasing your state income tax deduction by 25%
Generally, the final payment for estimated state income taxes is due by due by January 15 of the next year.
Here's the catch. While estimated taxes paid on January 15 are applied toward the previous year's tax liability, they are not deductible on your federal return until the next year.
Let's say estimated state income tax payments due on January 15, 1997 are $800. This $800 tax is for a 1996 tax liability. However, it is not a deduction on your 1996 federal tax return because it was paid in 1997.
Now, if you pay this estimated payment on December 31, 1996, just two weeks earlier than the law requires, you get an extra $800 deduction in 1996. Be sure to repeat the process next year to avoid losing an $800 deduction.
This is just one of my many tax saving tricks found in my book Double Your Tax Refund.
No. 3 - Turn your attic into a bank vault. Then Rob It!
One of the great myths about non-cash charitable contributions is that the deductions are limited to $250. This is not true. Once you understand this, the possibilities are endless as to how much you can increase your tax deductions by raiding your attic or your garage.
The best part about non-cash charitable contributions is that there are hundreds of IRS-approved charities that need and want donations other than cash. It's much easier to give someone a lamp you valued at $30 than it is to raise $60 in cash to buy a new one. Both give off the same amount of light and both serve their purpose equally well.
The IRS has valuation standards you can apply to your gift giving. When you use special forms also made available by the IRS, you can increase your deductions, lower your tax and help someone in the process. Why sell something at a garage sale for $3 when you can donate it and get a $10 deduction.
For dozens of examples of how you can increase your non-cash charitable contributions, order my book Double Your Tax Refund.Source: taxhelponline.com