Follow the 7 tips on being tax smart with your savings as listed later in this article to keep more of your money. According to the IRS, you must pay taxes on all the interest you receive, from the first dollar.
The IRS will send you a 1099 if you earn more than each year. If you earn less, they won’t send you the form. However, you still need to report all your earnings from savings. Some interest is tax-deferred which means you won’t pay taxes until you withdraw it. However, you will still pay taxes.
Here Are the 7 Tips Being Tax Efficient with Your Savings
#1 Report Your Income
- If you get cash from your savings in the form of a payment or withdraw, you should keep definitely track of it, to the penny. You are surely responsible for paying basic income taxes on those withdraws that constitute interest.
#2 Open a SEP IRA
- You can save more pre-tax money in a SEP IRA than you can other types of IRAs. The max contribution is a lot higher. Plus, you will only pay taxes after you take the money out and only on the interest. So if you invested after-tax money, only the interest is taxable, which saves you money.
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#3 Use Money toward Qualifying Expense
- You can sometimes withdraw money, even money that constitutes interest from your savings, without paying taxes on it if you have a qualifying expense. Be careful though because this is not for a new automobile, but expenses like college tuition or medical bills.
- Qualifying expenses may change with each tax year, so you may want to check on your individual situation. You or individual family members may qualify. I would only do this in an emergency, because it could cost you a steep interest percentage. Always look to protect your investments.
#4 Keep Withdraws Lower
- Try to get by on less cash from your savings being withdrawn each year, withdraw less. Only take what you need, and you will only pay income taxes on the interest that you take. Be frugal when possible, in other words.
#5 Save with Money Market Funds
- An excellent way to control your taxes is to save in a money market fund with after-tax dollars that allow the interest to be untaxed until you withdraw your money later.
#6 Open a Health Savings Account
- If you have a lot of health care costs, one way to shield your money is to put pre-tax money into a health savings account that you then use for your health care payments.
#7 Understand the Rules of Your State
- Understand the Rules of Your Stat . Where you live has different rules than the federal government does. Always look up your state tax rules before investing and after investing, so that you know how to avoid paying more than you must.
Since tax laws change frequently, it’s highly imperative that you talk to your own financial advisor before making any decisions about whether you owe taxes or how to defer them to a later date. You want to pay all the taxes you owe, but no more than you owe.
If you can postpone something, you should – with one exception: receiving tax-free cash. Remember that cash today is always worth more than cash tomorrow.
Follow the 7 Tips on Being Tax Smart with Your Savings as listed above and you’ll be able to enjoy more of your hard earned money.