BE PROACTIVE: 5 TAX RESOLUTIONS FOR FILING NEXT RETURN
The dreaded April 15 tax deadline has passed, and another tax season will open. While preparing your tax return, you learned a lot of lessons and made mistakes along the way. As you embark on another tax season, here are the five resolutions you may undertake to benefit next year’s return.
Resolution 1: Keep Tax Records
Keeping records to support your tax return is one way of maximizing write-offs. Documentation includes canceled checks, credit card statements, paid invoices, and receipts, as well as diaries for business/work related travel and entertainment expenses. Create a system for maintaining your receipts and other papers. It is way better to organize these items than spend time – and money – for the next tax year.
Recordkeeping for several items may be cleared up by using applications, which can track your charitable contributions, business mileage, and business entertainment cost. Some are free, but other tax-related apps are deductible.
Resolution 2: Delay Receiving Income
If you can postpone receiving an income the following year, you have deferred taxes. And if you are in a lower tax bracket, you will save taxes in the future. The following are some of the deferral options:
- US savings bonds – With these bonds, the interest can be delayed until you redeem the bonds or after its final maturity, 30 years for EE and I bonds. Such investments have no very high rates, making it the safest instrument an individual can have. And the interest on bonds can become tax-free if redeemed to pay qualified education expense for your child.
- Compensation plans – Employees can opt to not receive year-end bonuses and other commission until retirement. But, here’s the catch: The payment cannot be assured, so in case the firm goes under you, you may lose the entire deferred income.
Resolution 3: Adjust Tax Payments
A refund on the prior tax return means you create an interest-free loan to the government, instead of enjoying your own money through the year. If you owed money, it can be challenging to generate cash to settle the bill. You may do the following to pay the right amount of taxes during the year:
- Modifying wage withholding – File a new W-4 with your employer. If you want less money withheld, increase allowances. Conversely, if you want more money withheld, reduce allowances.
- Voluntary withholding – Choose to withhold certain payments such as unemployment compensation and Social Security benefits. File W-4V with the right government agency giving the payment.
- Paying estimated taxes – Come up with four estimated tax payments for the current year if any of your investment income or other income source is not subject to withholding, and the projected tax bill cannot be covered by raising wage withholding. You can put up another savings account to law money away for such payments.
Resolution 4: Maximize Pre-tax Opportunities
Reducing your tax bill is good, but cutting your adjusted gross income (AGI) is better. Doing so can give you breaks (or higher breaks than before). Check the pre-tax opportunities that can avail with your employer:
- Contributions to 401(k), 403(b), and 457 plans – You save for retirement and part of the income added to the plan is not currently taxed.
- Flexible spending account (FSA) contributions – For paying out-of-pocket medical expenses or dependent care expenses. Some companies offer both.
- Monthly transit passes through the employer – Paying commuting costs that would otherwise be considered nondeductible.
Utilize all of the above-the-line deductions to cut your AGI. It entails contributions to alimony, health savings account, IRAs, and three items for self-employed individuals: health insurance premiums, 50% of self-employment tax, and retirement plan contributions. The easiest way to search these is to look at the section on Form 1040 (Adjusted Gross Income).
Resolution 5: Pay Attention to Taxes in a Year
Tax rules change from time to time. Keep abreast of the changes in court decisions, IRS pronouncements, or legislation. It is also advisable to have and develop a constant relationship with a tax advisor who can share recent developments about taxation. Set appointments with this professional at key times: middle of the year, end of the year, and whenever there is a major life change than can affect your taxes.
Remember these two words when you prepare next year’s tax return: be proactive.
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