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Taxes Done? Great!! Now, Get Ready for Next Year.
April 15th is Coming!
Don't celebrate too long.
You are pleased that you got your taxes done. It was a hassle, a headache, but it is over. But, now it the time to make it easier for next year.
Make next year's tax filing easier. Prepare now and throughout the year to ease the pain next filing season. Before you put this year's return away, look it over to see where you can adjust, plan, or improve to lower you tax bill.
All those receipts that you couldn't find this year, get organized and start saving the ones for this year now. Organize them in a binder. Buy a calendar and a small notebook to document business and travel expenses and mileage.
Pay attention to tax law changes that occur over the course of the year. Expect changes at the end of the year that could not only affect this year, but also next year and years to come.
Cut your Taxable Income
I am not recommending that you go and ask your boss to cut your pay. In fact, ask him for a raise, but use the increased pay to decrease your tax bill.
Increase your pay, decrease your taxable income, decrease your income tax, how is this possible? Make allowable contributions with pretax dollars to certain retirement or employee benefit plans that also decrease your taxable income.
- Increase your contribution to your employer's 401(k) Plan If your company has a 401(k) or similar plan, increase your contribution. Increase your contribution to the maximum if possible or at least to the point of receiving the maximum company match.
- Contribute to a traditional IRA For some taxpayers, contributions to a traditional IRA may be tax deductible. Even if it isn't or you decide to contribute to a Roth IRA, the money in the account will grow tax-free. In the case of a Roth IRA, you will never pay taxes on the withdrawals made in retirement.
- Contribute to a Health Savings Account (HSA) If you have a high deductible health plan you may be eligible to contribute to an HSA. In addition to tax-free growth, withdrawals are not taxable if used to pay allowable health expenses.
- Contribute to a Flexible Spending Account or Cafeteria Plan If your employer offers a Flexible Spending Account, tax-free contributions can be made every pay period. Money in the account may be used to pay for health insurance deductibles, co-payments, prescription medications, dependent care, and even some commuting expenses such as parking or public transportation to and from work.
Adjust your withholding
Got a big refund this year? Don't give Uncle Sam a free loan again. Owe money this year? Don't get stuck paying penalties and interest because you don't have enough money taken out of your paycheck or pension.
- Adjust your withholding You can adjust the tax withholding from your income by filing a new W-4 with your employer, have the withholding adjusted from your social security benefit by filing a W-4V or from your pension, 401(k) or IRA by filing a W-4P.
- Make estimated payments For self-employed or those with significant passive income from investments, adjust your quarterly estimated tax payments by filing a 1040-ES.
Don't use the shoebox method of record keeping. Get organized now. Get a multi-compartment file folder, a small notebook, and a small calendar. Put in a little time throughout the year and save yourself a lot of time and headache when you file. In addition, more accurate record keeping could result in a lower tax bill, a larger refund, and a better defense should you ever get audited.
In the file folder make sections for:
- Charitable Contribution Receipts (Cash and non-cash)
- Taxes paid such as real estate, income, property, and excise taxes.
- Medical expenses, particularly if you anticipate having enough medical expenses that they will exceed 7.5% or your adjusted gross income.
- Business related expenses for travel, entertainment, home office, and other business expenses. (Even employes may be able to deduct unreimbursed expenses to the extent that they exceed 2% of AGI).
In the Calendar record:
- Business Travel: dates, location, purpose, and clients in attendance or visited
- Medical related travel: dates, location, purpose of the travel.
- Charitable related travel: dates, charity, and purpose of travel.
In the Notebook:
- Business related expenses, particularly meals and entertainment expenses.
- Automobile expenses if taking actual expenses or mileage. Include tolls and parking expenses. Not the purpose of the trip; business, charity, medical, or moving.
Plan and Strategize
If you have a financial adviser, discuss strategies to decrease your tax liability.
- Consider taking advantage of tax credits that maybe expiring by the end of the year.
- Optimize the timing of stock or mutual fund sales both those at a loss or those with significant gains.
- Consider donation of vehicles, valuable items, or appreciated stock or mutual funds.
- If retired, the timing and amount of IRA or 401(k) withdrawals or other financial transactions may be important in managing your tax liability or potentially bumping you into a higher tax bracket. Social security benefits become taxable above certain incomes.
Watch out for the Changes
The President and Congress continue to battle over raising revenues and cutting spending. A quest for new sources of revenue or a desire to simplify a very complicated tax code promise to bring tax law changes in the months and years to come.
While tax rates in 2013 will rise (maximum tax rate of 39.5%) for families earning over $450,000 and individuals earning over $400,000, increases in the dividend and capital gains tax rates as well as limits on deductions will have many earning well below these amounts see their tax bills increase.
The Affordable Care Act (ObamaCare) has many new taxes scheduled to begin in 2013. It includes an increased Medicare tax (0.9%) on income over $250,000 for families, $200,000 for individuals. It will authorize a 3.8% Medicare tax on investment and passive income. Medical expenses will have to exceed 10% of AGI to be deductible. Flexible spending account contributions will be limited to $2,500.
Democrats talk about taxing the rich as well as the "Buffet Rule" to make sure the very wealthy pay their fair share. Republicans talk about flattening the progressive tax code and eliminating some deductions.
Don't expect anything to happen soon. Lately, members of Congress from both parties and the President are guided by the 3 P's: Politics, Paralysis, and Panic. Given the political climate it seems that few, if any, politicians have the guts to take a stand and pass an overhaul and simplification of the current tax code.
Any federal tax or tax planning information provided above or linked to this article is not meant to be specific to any particular individual or situation. Anyone who wishes to apply this information should first discuss it with an accountant or tax professional to determine its appropriateness or how it specifically applies to their unique situation.
© 2012 bankscottage