Tax Liability Information

Tax liability information: even when the tax year is drawing to a close, you still have the opportunity to make some changes that will help reduce your income tax liability.

If someone was to ask you if you liked to pay taxes, you probably would say not really. But unless you know what is deductible or not, you may be paying too much in taxes each year. The Internal Revenue Services publishes many publications which give details about what can and cannot be considered deductible and other information required when filling out your taxes each year. With the constant changes that are made each year, many Americans prefer to have a professional tax preparer to complete their tax forms for them.

The professional tax preparers can keep up with the changes and explain which ones will affect you or your business. The problem is that often they are not consulted but once a year when the client brings their tax information in to have the forms prepared. At that time, it is too late to make much of a difference on the tax liability for the tax year you are filing. You may have the option of making an IRA contribution but that may not reduce your tax liability enough.

The best way to reduce your tax liability is to keep current and accurate books on a regular basis. This should be done at least monthly or quarterly depending on the size of your business or the amount of tax deductible expenses you have. Although updating daily is preferred, sometimes all that can be done daily is just a simple journal or a log of expenses and income. This can be totaled monthly or quarterly which will tell you where you stand up to that point as far as a profit or loss goes.

It is best to consult with your tax preparer on an at least quarterly basis. This way they can take a look at how your tax liability is looking at that point and inform you of how much estimated tax payments to send in for that period. If you fail to pay in enough on a regular basis by either your taxes withheld from your wages or by making quarterly estimated tax payments, the government may require you to pay a penalty for not having enough paid in. This can be avoided by working with your tax preparer to determine how much you would need to pay in and making the payments in a regular and timely fashion. Many taxpayers avoid this penalty by paying in 100% of the amount of their tax liability for the previous tax year.

If you have purchased goods or services on credit and use the cash basis for your accounting method, you may want to consider paying as much on your accounts as you can before the end of the year. This is basically just paying for the goods and services which you have already used or sold. Credit can be used as a way to allow yourself time to sell the product before you actually have to pay for it throughout the year. If at the end of the tax year, you pay for as much of the products that you have used as possible, you will have a more accurate figure of what your real income and expenses are for the tax year.

This same principle applies to personal medical bills. If you have several medical bills and you are fairly certain that you will be able to itemize, you may want to look into possibly paying as much on the medical bills as possible before the end of the year. Medical bills are deductible if you itemize in the year that they are paid. There is a seven and a half percent of the adjusted gross income amount that is excluded. Planning when to pay the medical bills or the majority of them can help save you some on your tax liability.

Charitable donations are another way to save on your tax liability. If you are planning on donating something to charity consider when you donate it. If you need the deduction more this year than next, try to make it before the end of the year. This can only be used, however, if you are going to itemize.

Although the interest deduction has changed over the year, you can still deduct home mortgage interest if you can itemize. Also any interest on loans used for business purposes are deductible on the business forms. Personal interest on cars and credit cards are not generally deductible but if the the credit card is used for business purposes, the business portion is deductible. The auto loan interest can be deductible based on the percentage of business versus personal usage of the vehicle.

Keeping accurate records and reviewing them on a regular monthly or quarterly basis goes a long way to reducing your tax liability each year. If the end is drawing near on your tax year and you see you have more of a tax liability than you have expected, don't panic. You still have time to take a look at your income and expenses and consult with your tax preparer for ways that can reduce your income tax liability as much as possible.

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