Tax Saving Strategies: 8 Ways to Plan Ahead To Save

It's never too early to start strategizing and looking into your options for reducing and saving on your tax bill, even if the tax season is still months away.

Taxes can seem like an unavoidable, unavoidable expense -- but they don't have to be as painful as you might think. Even though tax season is months away, it's never too early to start planning your strategy and researching your options for lowering your tax bill. Unfortunately, taxes are one of the few bills we can't avoid paying. 

But that doesn't mean you can't plan ahead and save on taxes wherever possible. Tax savings strategies involve planning your finances during a year so that come April, you pay less tax than what is normally due from you (in other words, reducing your taxable income). Here are eight ways to plan ahead and save on taxes.

1. Reduce Your Exposure to Taxes

First and foremost, reduce your exposure to taxes by choosing the right investments for you. For example, when you're choosing between a taxable account and a tax-free account, a good rule of thumb is to go with the account that will get you the least exposure to taxes. You can also reduce your taxes by choosing the right investment vehicles, like mutual funds and exchange-traded funds (ETFs). 

Mutual funds, for example, are often structured as "passive," meaning they are designed to be held for the long term and are generally less tax-efficient compared to ETFs. ETFs, on the other hand, are often "actively managed," meaning they are designed to be traded frequently and are generally more tax-efficient compared to mutual funds. Your choice of investment vehicles should also be tailored to your portfolio's overall risk level. Generally, the more aggressive your investment strategy, the more you stand to gain; but you also stand to lose more. So, be cognizant of the additional taxes you're likely to pay on your higher income.

2. Pay your taxes quarterly

Depending on how much money you make and how much tax you owe each year, you might be required to pay all of your taxes at once. However, if you owe taxes at the end of the year, paying them in installments can help you save a ton of money (and thus reduce your taxable income). You can make quarterly payments by setting up an Electronic Federal Tax Payment System (EFTPS) account and having a portion of your taxes withdrawn from your bank account on a quarterly basis. Depending on your income and spending, you might be able to establish a payment schedule that permits you to pay off your taxes in 10 to 15 years.

3. Emergency Fund

An emergency fund of at least three to six months' worth of expenses is a good idea for everyone, including people who are always meticulous about their taxes. This fund is there in case you fall sick and have to miss work, or in case there's an unexpected expense that pops up and jeopardizes your budget. If you're receiving government benefits, you may come across a scenario where you have to pay back taxes. 

If you have an emergency fund to fall back on, you won't have to sell your investments at an inopportune time just to pay back these taxes. A tax penalty may be the last thing you're worried about when your car breaks down, or you have to pay for an unexpected medical procedure. But if you don't have enough cash on hand to cover these expenses, you may have to pay taxes on it. An emergency fund can help you avoid these problems.

4. Contributing to tax-friendly investments

Smart tax planning also involves contributing to tax-friendly investments. For example, if you're a resident of the United States or a citizen of the Philippines, you can contribute to a traditional Individual Retirement Account (IRA) or the Philippine Retirement Funds that are tax-free until you start withdrawing money in retirement. If you're a resident of the United Kingdom, you can contribute to a Pension Plan that is tax-free until you start withdrawing money in retirement. If you're a resident of Canada, you can contribute to a Tax-Free Savings Account (TFSA) that can help reduce your taxable income while also providing you with tax-free growth.

5. Utilize tax-free savings accounts

Tax-free savings accounts are another excellent way to lower your taxes. These include the United Kingdom's ISA (Individual Savings Account) and Canada's Tax-Free Savings Account (TFSA). In the UK, for example, you can put away up to £20,000 ($26,700) in a TFSA account and not pay taxes on any gains you earn from the investments in your account. 

The same goes for other countries: you can contribute a set amount every year and avoid paying taxes on the interest you earn. Tax-free savings accounts are long-term investment vehicles. This means you don't want to be trading in and out of your investments regularly because you would incur substantial trading and management fees. As such, these investments are best suited for people who are in it for the long haul.

6. Discretionary Investment Strategy

Another excellent way to lower your taxes is to design and implement a discretionary investment strategy. This means you decide which investments to add to your portfolio and when you want to sell them. You don't have to follow a set, rigid investment plan like you would with an automatic investment strategy. A discretionary investment strategy gives you more control over your finances and allows you to take advantage of market fluctuations and tax advantages. 

A discretionary investment strategy is meant for advanced investors who understand the risks associated with investing in individual stocks and other securities. You can diversify your portfolio and reduce your overall risk by investing in mutual funds and ETFs. You also have more flexibility to sell your investments at an inopportune time if you have to pay back taxes.

7. Claiming deductions

Last but not least, an excellent way to lower your taxes is to claim all the deductions you're eligible for. You can do this by keeping thorough records, like receipts and bills, so that you have documentation to back up your claims. For example, you can save on taxes by claiming deductions on mortgage interest and property taxes. If you have a dependant or a child in college, you can claim deductions on tuition fees and books. If you own a home, you can also claim deductions on repairs and maintenance costs. If you're self-employed, you can claim deductions on equipment and software (e.g., CRM, accounting software, and project management tools).

8. Managing your portfolio and selling your investments at the right time

If you have to pay back taxes, selling your investments at the right time can help you manage your portfolio. For instance, you might have to pay taxes on the gains you made from those assets if you sell equities with substantial capital gains too soon to the end of the year. You can deduct short-term capital gains if you have to pay taxes on gains on investments you held for less than a year. This means you're only taxed at the ordinary income tax rate. If you have to sell investments with long-term capital gains, on the other hand, you can claim a long-term capital gains deduction. The lower long-term capital gains tax rate is applied to your taxes as a result.

Conclusion

Taxes are an unavoidable expense -- but they don't have to be as painful as you might think. It's never too early to start strategizing and looking into your options for reducing your tax bill, even though tax season is still months away. Taxes are one of the few bills we can't avoid paying. But that doesn't mean you can't plan ahead and save on taxes wherever possible. Tax savings strategies.