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Finances in 55 Seconds: Reviewing Your Tax Strategy

Now that summer is clearly underway, and the year is firmly in its second half, it might be a good idea to review your tax strategy. For many of us, a “tax strategy” is nothing of the sort; we just do what we do and hope that some of it turns out to be tax deductible. This can lead to you paying more in taxes than you need to.

Rather than waiting until the end of the year to see what you can make of your tax breaks, you can actively work toward reducing your tax liability [3] throughout the year. This means that you will need a tax strategy designed to help you pay less. While implementing a tax strategy takes more than 55 seconds, you can do a quick review of your tax strategy in less than a minute. So, grab your last tax return and consider what you can do to improve matters:

  1. Consider your withholding: Review your tax withholding. If you received a large refund, your tax withholding could probably be smaller. Think about reducing your withholding so that you aren’t giving the government an interest-free loan; put that money to work for you instead. (7 seconds.)
  2. Examine your portfolio: Do you have some confirmed losers in your investment portfolio? This year might be the time to sell and offset some of the capital gains [4] you might have for some investments. Also, consider long term vs. short term capital gains payments. Remember that, for 2011, long term capital gains are not taxed for those in the lowest bracket. (27 seconds)
  3. Think about deductions and credits: Now is a good time to consider deductions you might be taking this year. Consider where your receipts might be kept, and think about things you can do in order to get more deductions this year. This can include giving more to charity, contributing to a Health Savings Account [5], donating some goods for a deduction, and keeping track of mileage traveled for work. Decide what items you can do in the second half of the year to reduce your tax liability. (21 seconds)

Take a little bit of time to review what you are already doing with your taxes, and then see if you could improve your strategy. Whether this means selling some long term investments now to avoid paying capital gains taxes later, or whether it means organizing some of your clutter for a donation to charity, there are ways for you to pay less in taxes. You can even plan some green home improvements to take advantage of credits available this year. The idea is to consider what you could do as the year draws to a close to decrease what you owe to the government.

A little planning now can make a good difference later. If you pay less to the government, you can use your money to work on your behalf, investing it and earning a return — rather than just sending it elsewhere. Make sure you are paying no more than you owe by creating a tax strategy that works for you.

(Photo: John-Morgan [6])