Lowering your tax liability is one of the fastest ways to increase cash flow and build wealth. I was making a long post about all the legal deductions that you are allowed to take and that most people miss on their tax return. Then I threw it away. There are lots of articles and resources on the internet that can give you that information and more.

If you don’t have a face to face meeting with your tax preparer then you should be using some kind of software to make sure that you are taking all the deductions that you are legally allowed to. This is a fast way to increase your cash flow and well worth your time.

What I really want to point out is that are many tax credits that people miss out on because they assume that their income is too high and they don’t qualify, and so they miss out.  A tax credit is a dollar for dollar reduction of your tax. Here are just a few of the most common tax credits:

Retirement Saver’s

Making Work Pay

Education-Lifetime Learning

Education- American Opportunity

Earned Income

Child and Dependent Care

First Time Homebuyer

Alternative Motor Vehicle

Health Coverage

Elderly or Disabled

Many people fail to tell their tax preparer of these things that could help them qualify for the credits. Here are some examples:

“I bought a hybrid car this year”

“I got laid off and am taking courses to improve my job skills”

“I am paying for my son’s college expenses”

“We bought our first home this year”

“We had high child care expenses”

“I made retirement plan contributions this year”

Let’s take an example of the retirement saver’s credit. This is a non-refundable credit is for individual ($1,000) or married filing joint ($2,000) for eligible contributions to an IRA or an employer sponsored retirement plan (401K, 403b). The credit is phased out to 0 if your adjusted gross income is over $55,001 (married filing joint) or $27,751 (single). With so many people having spouses out of work, many people qualify and don’t know about this.

Remember a credit is not like a deduction. A tax credit is cash in your pocket now. A tax deduction lowers your overall income so your tax is lessened.

Make sure your tax preparer knows your situation. Fill out the tax organizer thoroughly. If you use software, make sure you answer all the questions about your household. Don’t leave money on the table because you didn’t have time to properly fill out the forms. To build wealth we make our money work for us so we can have a secure financial future.

The post Miss Out on Tax Credits and Miss Out on Building Wealth first appeared on Whole Hearted Way.

For example, if you earn $100,000 a year and contribute $10,000 to a 401(k) plan, you’ll pay income taxes on $90,000 instead of $100,000 so you saved taxes on $10,000 of income. Woohoo!!!

Most of you also get a “matching contribution” from your employers. For example, you earn $30,000 a year and work for an employer that has a matching 401(k) plan. The match is half of every dollar up to 6 percent of your salary. Each year, you contribute 6 percent of your salary ($1,800) to the plan and receive a matching contribution of $900 from your employer. That’s an automatic, no risk return of 50% on your investment! Woohoo! Yet a recent study found that, among employees younger than 59 ½, 54% did not take full advantage of the company match!

Now the downside – okay, so you can’t take the money out until you are 59 ½ years old or there are severe penalties – like a 10% federal penalty and 2.5% state penalty (if you live in CA) plus federal and state income taxes on the amount withdrawn. A cash withdrawal on a credit card is cheaper than this. But that is why they call it a retirement plan, folks. It really is for when you retire.

Let’s talk about the deferral part. If you could save $15,000 a year for 30 years in your 401K and let’s assume you only got a 5% return annually on your investment, you would have accumulated $67,016. But if you had it in a taxable account (assuming a 25% federal and 6.8% state tax rate), you would have accumulated only $41,662. Big difference! Taxes do eat into your return.

President Bush signed the Pension Protection Act of 2006 into law on August 17. The PPA contains many changes for defined contribution plans (401K, IRA, Roth IRA, SEP-IRA, etc). See your Financial Advisor to make sure that you are taking advantage of these changes.

Sign up for the maximum contribution to your 401K plan at work now. You won’t miss the money. For a specific calculator to see how much you would save with your 401K, check this out: Individual 401(k) Savings Calculator

The post Reduce Your Tax Liability-It’s Legal first appeared on Whole Hearted Way.