3 Things to Do Between Now and Tax Time
August 22, 2017 : Eli Colmenero – The Tax Institute
You may feel like it was just yesterday that you were digging around your house for financial statements to get your taxes done. But tax season is not the only time that you should worry about your taxes. In fact, throughout the year there may be several opportunities for you to get some tax savings. Here are a few tips for you to make sure you are getting the most out of your tax planning!
1 – Adjust Your Withholding
Most of us really love getting a refund check after we file our taxes. But how many banks do you know that will loan you the same amount of money as your refund check for zero percent interest? Probably few. When we withhold too much form our paycheck, we essentially loan our money to the government interest free. Could you have used that extra money in your pocket year round? If not, why not put it in a savings account or a CD to earn some interest?
Ideally, you do not want a tax bill or a large refund. This is accomplished by regularly adjusting our withholding on Form W-4. However, if you count on a large refund each year, you should update your withholding whenever a major change happens in your life. This includes starting a new side hustle for extra cash, you or your spouse getting a new job, a change in filing status, or bringing a little bundle of joy into the world that you get to claim as a dependent. The sooner you adjust your withholding, the bigger the impact that change will have.
2 – Start Saving for Retirement
Contributing to an IRA is a great way to start planning for the future while potentially getting immediate tax benefits. Depending on the taxpayer, up to $5,500 may be contributed to a traditional or Roth IRA annually and if you are 50 years or older, up to $6,500 per year! As always, the earlier the better. Even if it is just a few small contributions throughout the year, the growth can be significant come retirement age. Depending on when you want to pay taxes, you have some good options between a traditional and a Roth IRA.
If you contribute to a traditional IRA, the contributions may be deductible depending on how much income you make. The IRA earnings grow tax free as well! Taxes will be paid when you make withdrawals, but under current law you don’t need to start taking distributions until you are 70½ years old!
If you make a contribution to a Roth IRA, your contribution is not tax deductible up front. But, the growth is tax free and the distributions are tax-free if you follow certain rules. Moreover, you may be able to tap into your contributions—but not earnings—any time without having to pay a tax penalty.
3 – Open a Health Savings Account
During open enrollment season, your employer may offer you a high-deductible healthcare plan that could allow you to set up a health savings account (HSA). These HSAs offer great opportunities for tax savings.
A taxpayer gets a deduction for HSA contributions, much like a 401(k) or a traditional IRA. If you take a distribution for qualified medical expenses, the distribution is also tax free, like a Roth IRA distribution. Additionally, the account grows tax free. Unlike a flexible spending account, you don’t have to spend your full balance each year! It’s not a use or lose it situation—you’re essentially getting your cake and eating it too!
If you pay attention to your tax situation year-round and make the right decisions, come tax time you will find that tax season will be a bit easier. If you ask me, next tax season seems like lightyears away—retirement is hardly a blip on my radar. But hopefully, you realize that failing to plan is planning to fail – especially when it comes to finances. Plan now – you will thank yourself later!