Wednesday, January 28, 2009

Three Tax Tips

The time has come again where I am preparing to do taxes for 2008. This year, like most years in the past, I am actually looking forward to doing my taxes. Fortunately, my W2 form came a little earlier than the January 31 deadline, so I was able to start early.

Many people recommend going to a professional to do taxes to avoid any mistakes. If you have a complicated return or are uneasy for some other reason, then I would definitely go that route. Personally, the first year I started my business, I made an appointment at H+R Block to get my taxes taken care of. As for the subsequent years though, I simply did the taxes online.

Over the past several years of doing taxes though, I've definitely learned some key tips that have really helped.

1. Make sure you adjust your tax withholding. If you have a business, you may find that you tend to owe taxes. In this age of shrinking economy, you don't want to be in that position next year, so make sure to pay quarterly taxes and/or increase your withholding at your primary job. This will help you by giving you some assurance that you will get a refund.

2. Know your deductions. Most people have specific situations due to business, retirement account, property, children, and dependents that impact taxes and deductions. Some of these things cannot be deducted after the fact though if there is not planning and proof. If you have had dramatic life changes, it can help to see a professional, if not to save money this year, at the very least to save money next year. An example for me is that the mortgage deduction shrinks each year so it is important to adjust accordingly.

3. Finally, make sure that you know your marginal tax rate. In the event that you are trying to make contributions to retirement accounts or do other tax planning, it is important to be aware of this. As salaries increase and income rises, these can change and start to make a dramatic difference. This is especially important for small business owners as the brackets can change by between 5 and 10%. A change this dramatic can effectively erase your profit margin for the final dollars you make each year if you're not careful.

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