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Do It Now - Get Ready for Tax Season

January 12, 2015

Even though the deadline to file your 2015 taxes isn’t until April 15, don’t wait until the last minute to get the ball rolling.

 

Unfortunately, many Americans procrastinate when it comes to getting their taxes prepared. About 20 to 25 percent of all taxpayers usually file during the final two weeks of the tax season, according to the Internal Revenue Service. This kind of procrastination can lead to costly errors and penalties, overlooked deductions and credits, and higher levels of stress. Whether your goal is to owe less money to the IRS in 2015, get a larger tax refund, or catch costly mistakes ahead of time, it’s never too early to start thinking about your taxes. Here are five things to consider doing now.

 

1. Increase your retirement plan contributions. What’s the best way to reduce your taxes? Reduce your income. You can do this by contributing money to a 401(k) or traditional individual retirement account (IRA), or both, as each move can lower your taxable income. Let’s say you earn $60,000 a year from your job and other sources of income and contribute $10,000 pre-tax to your 401(k)plan and $5,000 to a traditional IRA. Your adjusted gross income drops to $45,000, which means less income the IRS can tax. Better yet, the money you contribute to both these plans is tax-deferred, which means it can grow untouched and will not be taxed for many years. You are taxed only when you take a withdrawal at retirement. With a traditional IRA, the amount you can deduct depend son your income level and whether you’re already covered by a retirement plan at work. Check out the IRS website for contribution and deduction limits.

 

2. Reposition your portfolio. Now might be a good time to reposition your portfolio with taxes in mind, selling losing investments to offset gains from winners—a strategy known as tax-loss harvesting. Sell a stock you’ve held for less than a year that’s gone up in value, and you’ll likely be taxed at ordinary income rates. But sell some investments that have declined in value, and you can offset this gain. Keep in mind that if you have more losses than you do gains, the IRS allows you to take up to $3,000 of losses to reduce your taxable income. So if you have one stock that’s gained $5,000—but also have one that’s lost you $8,000—you can likely report it as a loss, reducing your taxable income by $3,000.

 

3. Step up your charitable giving. Not only can you help those in need with your generosity, but you can also help yourself as donations to qualified charities may count as tax-deductible expenses. While this may not come as a surprise, the IRS does set a few guidelines. To be tax deductible, charitable contributions must be made to qualified organizations that have501(c)(3) status. This usually includes non-profit groups like churches and schools, as well as charitable organizations like Make-A-Wish, the Red Cross, or the Salvation Army. Check out the IRS’ database of eligible organizations for a complete list. To deduct charitable expenses, you must itemize your deductions instead of claiming the standard deduction. For 2015, the standard deduction for single taxpayers is $6,300 and $12,600 for married couples filing jointly. Your decision to itemize will likely depend on whether your total itemized deductions exceed the standard deduction limit. See a professional tax advisor for further guidance. You should keep receipts and records of your donations, indicating the amount you’ve donated and the date it was received. Keep copies of all receipts from the charity, credit card statements, or cancelled checks that prove your donations in case you are audited.

 

4. Contribute to a health savings account. If you are covered by a high-deductible health plan (deductibles greater than $1,250 for individual coverage and $2,500 for family coverage), you may want to look into establishing a health savings account. This is a powerful tool that can help you cover medical expenses and save for the future. There are three tax benefits to health savings accounts. First, just like a 401(k) plan, contributions are pre-tax, which reduces your taxable income. Next, all earning sand interest accrued in the account are exempt from federal taxes, allowing your investments to grow and compound tax-free year after year. Finally, you can take distributions for qualified health expenses tax-free, which should include out-of-pocket medical costs on deductibles, prescription drugs, and doctor visits. For 2015, you can make pre-tax contributions up to $3,300 if you have individual coverage, or up to $6,550 if you have family coverage. However, people age 55 and older can save an additional $1,000 per year.

 

5. Explore possible tax credits. Tax credits and deductions might sound similar, but they’re not. Unlike a deduction, which reduces the amount of your income subject to tax, a tax credit is money that directly reduces the amount of tax you’ll owe to the government. So if you owe $2,000 in taxes but qualify for $1,500 in tax credits, you’ll only owe the government$500. There is a wide range of tax credits available, and here are some of the most common:

• The earned income tax credit. This credit provides financial help for low-income working families. Families with three or more children may receive a credit of up to $6,143 in 2015, and those with two qualifying children can receive up to $5,460, although the actual amount will depend on your level of income and how many dependents you claim.

• Child and dependent care credits. Taxpayers who paid work-related expenses for the care of a child can take advantage of this credit. The credit is generally a percentage of the amount you paid in work-related expenses to a care provider, according to the IRS.

• Residential energy credits. Energy-efficient additions to your home such as a solar hot water heater, wind turbines, and solar electric equipment may make you eligible for these credits. Ideally, you should be thinking about tax planning year-round—not just a week or two before your taxes are due. By implementing these cost-saving strategies, your wallet should thank you come April. 

 

 

 

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