What's the best way to minimize your tax liability come April?

Question

I have recetly made a dramatic jump in tax brackets. In other words I just graduated form college and now have a good job. How do I keep the "gubment" from taking it all?

Answer 1

I assume you mean the total tax liability, not just the extra amount due after withholding has been taken out.

Since you will be receiving wages, I assume they will be the major source of you taxable income. You should take advantage of the 401k program at your employer (or if none, then an IRA). This will allow you to decrease your taxable income. Put in the maximum that your company's plan permits.

For your investments outside of a tax deferred account, and if you live in a high tax state, you can shield some income from state taxes by buying treasury bills or notes. Interest paid on treasuries can't be taxed by the state. If your tax bracket is high enough you might prefer investing in municipal bonds from your state. The interest from muni bonds is free from federal tax and state tax (where issued).

Qualified dividends are taxed at a max rate of 15%. Even better is to hold appreciating stocks...no tax on the appreciation until you sell.

Answer 2

Tax liability comes every day you make money, not just in april.

You have made the mistake of making money. The more you make, the more they will take. The farther up in the tax brackets you go, the less deductions you will have. (there are no tax deductions for the rich, that is a current myth) These are the facts.

Welcome to the world of the working. Enjoy.

The only legitimate decdutions are children, retirement accounts,home mortgages and if you start a business you can write off legitimate business expenses. In this case it can be good to mix business with pleasure.

Never think of getting money back in April a win. The more money you "get back" is the more money you gave the government for a free loan. You could have been putting that money in saving at 5% year interest and having more in your pocket. Take as many exemptions as you can, but always put that money into savings so you will have enough pay it off in April. Late fees and interest from the government are worse than payday lenders or Loan sharks!

Answer 3

Well, this may not be a good option yet, but mortgage interest is deductable. If you can find an affordable home and can get an affordable loan, that will reduce your tax liability(but will probably give you other bigger headaches). So will getting married, having a kid, and other expensive things.

The most painless way to reduce tax liability is a Roth IRA, but that applies to unearned income, not job income. A 401k is money you can't touch until you're 59 and a half.

If your taxbite is getting really big, your can always try negotiating for nontaxable fringe benefits in lieu of higher pay at your job. If you get $700 worth of benefits you ENJOY, that's just as good as $1000 worth of a pre-tax raise if your marginal tax rate is 30%, in theory.

Answer 4

First, make sure you are having enough tax withheld from your check as suggested by the first answerer. Suggestions: http://www.fool.com/personal-finance/taxes/2006/10/20/life-and-tax-changes.aspx

Second, minimizing your annual tax bill involves far too much to try to explain here. You've received some basic advice from other answers. The first things I would suggest are

1) take full advantage of any 401k offered by your employer. Max out any matching funds the employer may offer. It's free tax-deferred money.

2) Open a ROTH IRA and max it out, if you can. This will not lower your current taxes, but will provide a basis for future savings and investing, with the profits - hopefully - tax free.

3) Save and invest regularly starting now. You will never regret it.

Beyond that, you should learn some of the basics of money management, including saving and investing. http://www.fool.com/ is a good starting place, if you don't mind the self-hype.

Answer 5

Make less money.

Truthfully, that is the only way to pay less taxes. Most tax deductions involve spending money so there is cash out of pocket and you never want to spend money just to get a tax deduction.

There are two exceptions to this rule: 1) Mortgage Interest. While rent is not deductible, mortgage interest is. If you can get a mortgage and buy a place, it may be worth looking in to.
2) IRAs/401ks. If your work offers a 401k, sign up. It will be less cash in your pocket but you are paying yourself. If your work does not have a 401k (and maybe even if they do) you should look into opening an IRA (Tradtional or ROTH). A tradtional IRA may give you a tax deduction now but it will be taxable in the future. A ROTH gives you no tax dedution but, as of now, it is not taxed on withdrawal. Again, you will have less money in your pocket, but you are paying yourself.

Answer 6

If now not they are hypocrites. My vote is on 'hypocrite'. i ask your self how particularly some his fortune Mikey Moore is going to donate to reason Obama. @conservative values: If which have been the case we does now not be complaining, now might we? for my section, the sole ones now not complaining are human beings that have not any reason to *****. are you able to artwork out why? seem indoors the mirror.

Answer 7

Claim zero exemptions and have a little extra taken out (you do this on your W-4 form). You might even get some back at the end of the year.

Good luck!