Common Tax Mistakes

As people save money it’s common to settle on accounts and savings that they’re familiar with instead of exploring all the options, when often times a little exploration will show better methods of saving money. Here we’ll explore and explain some mistakes people will make so you may better understand how to plan for the future.

One problem that people face frequently is not using accounts that have tax advantages. For instance, many people will use traditional IRAs and 401(k) accounts in order to reduce their current taxable income. The issue with these is that they will still owe taxes when the money is withdrawn later. By setting up a Roth IRA, the taxpayer will pay taxes on the amount owed now, but may withdrawal later tax free. Of course, which is better for the taxpayer depends on tax brackets and future plans, but having options is the key to financial success.

Another common mistake is people that sell their investments on the short term win, instead of thinking about long term gain or the tax incentive. Any investment that is under one year will be taxed as ordinary income, while some investments that are owned over one year will be taxed as capital gains. This can be beneficial when the sum of money is larger because the difference between ordinary and capital gains can be significant. Sometimes waiting for that the year to pass is the worth the price.

If you have questions about taxes or financial planning contact us at the Center for Financial, Legal & Tax Planning, Inc.