Reduction Strategies

Federal taxes are up. So are some state taxes. Yet in response, opposition is rising, especially on the state level. With luck, the tax burden might recede.

But meanwhile, brace yourself. Years ago, I received valuable insight into Internal Revenue Service practices. The IRS was auditing a client of mine, who was late on his returns. The fines he faced were daunting. My argument was that the client, a small businessman, was taxed too heavily to stay in business.

Tax season is over with April 15 behind us, but it isn’t really. If you have income that an employer does not withhold on your paycheck, it’s wise to make quarterly payments based on estimates of this revenue. Here’s a guide.

The important take-away: When you have income from sources other than traditional employment, you must make estimated tax payments to the Internal Revenue Service throughout the year to avoid a massive tax bill and penalties next April.

Many people, especially higher-income types, will pay higher taxes next spring. Don't be surprised that your returns take a bigger bite from your 2013 income.

While we were celebrating the New Year on Jan. 1, Congress passed a last-minute compromise on the fiscal cliff debacle called the American Taxpayer Relief Act of 2012.

The top tax rate on capital gains went up this year. If you and your advisor are smart with tax planning, you don’t have to pay this rate at all.

Should you make more than $400,000, and you sell an asset that increased in value, the tax on your gains is now 20%, up from 15% last year. This includes securities that rise in price, dividends from stocks and profit from a home. If you make between $36,250 and $400,000, the tax is 15% and if you make less than that, you don’t have to pay taxes on capital gains.

With less than two weeks until taxes are due, you may find yourself scrambling to get your return filed. Here are some tips, tricks and reminders to make your filing a little easier, and make sure that you get the best result possible this year.

 1. Determining which 1040 to file. Taxes are complicated, and figuring out which forms you need is a yearly headache as your financial situation changes. Look at this quick breakdown of the main individual tax return forms and who should file each one:

What states tax retirees the least? That’s something to ponder as you plan where to retire to. It’s not the predominant factor, but an important consideration.

Kiplinger’s put together an interactive map that shows tax friendliness for retirees. The magazine has links to states with no sales tax, or low sales taxes, no income tax and more.

If you adopted children, be aware of some changes to the adoption credit for the 2012 filing season. In some ways, the credit is more restrictive.

In the past, for tax years 2010 and 2011, the adoption credit was refundable – meaning that you receive the entire credit regardless of the amount of tax you have to pay. For example, if you had $10,000 of adoption credit and you owed $6,000 in overall taxes, you claimed the entire credit and received a refund of $4,000. This was in addition to any overpayment you may have made on your withholding.

This tax season, remember to take the long view as you reduce your final bill. Short-term focus might reduce total taxes in the present year, but at the cost of higher taxes in the future.

Advisors look at your financial picture over many years and decades, sometimes recommending that you give up current tax savings to target bigger savings over the long-term. This is why an advisor's suggestions are often at odds with that of your tax preparer, who focuses on the past and current years.

Getting a tax refund is an opportunity to make some smart financial decisions. This money can beef up savings and whittle down debt. But the wisest course is to adjust your withholding to avoid getting a refund in the first place.

The average tax refund was $3,000 in 2012, so many people receive enough to greatly enhance their financial situation. Here are a few smart ways to use your tax refund. 

Working with a tax preparer as April 15 approaches frees you from the stress of doing your returns and make sure they're done correctly. But how do you choose such a person

There are a variety of professionals with different qualifications and expertise, and they all charge different fees for their service. Here are a few tips for finding the best tax preparer for you.