Make These 5 Tax Resolutions For Next April 15
Let the lessons you learned on your 2014 income tax return lead you to new actions that will make it easier to handle your 2015 return. Here are five things you can do now that will reward you next tax season, and easy ways to make them happen.1. Maximize your pre-tax opportunities
Deductions are great for reducing your tax bill, but even better are ways to reduce your adjusted gross income (AGI). Doing this not only reduces your tax bill, it can also entitle you to breaks (or greater breaks) than before (more than two dozen tax rules are tied to AGI). Here are ways to reduce your AGI:
Take advantage of pre-tax opportunities on the job (check with your employer to see whether they are available):
- Salary reduction contributions to 401(k), 403(b) and 457 plans. You save for retirement and the portion of salary added to the plan is not currently taxed.
- Flexible spending account (FSA) contributions to pay out-of-pocket medical costs or dependent care costs (separate FSAs are used for these purposes so, if offered by your company, you can have both).
- Monthly transit passes through your employer to pay commuting costs that would otherwise be nondeductible.
And be sure you use all your above-the-line deductions, which also reduce your AGI. These include contributions to IRAs, alimony, health savings account contributions, and three specifically for self-employed individuals (health insurance premiums, half of self-employment tax and retirement plan contributions). The easiest way to find these is simply to look at the section on Form 1040 labeled Adjusted Gross Income.2. Keep better records
To optimize your write-offs, you need great records to support what you do on your tax return. These records include canceled checks, paid invoices, receipts, credit card statements and self-prepared logs or diaries for job/business-related travel and entertainment costs. Create a system to retain your receipts and other documentation (e.g., an expandable folder; three-ring binder; electronic records generated by scanning receipts into your system) so you can organize items as you go along rather than spending time (and money if you have a tax pro do it for you) next tax season.
Recordkeeping for many items can be simplified by using apps. For example, there are apps to track your charitable contributions, your business mileage in your car and your business entertainment costs. Some apps are free; any cost of tax-related apps is deductible.3. Adjust your tax payments for 2015
If you had a refund on your 2014 return, you may be celebrating but understand that you made an interest-free loan to the government instead of enjoying your own money throughout the year. (See The First Thing You Should Do With Your Tax Refund.) If you owed money, it may have been challenging to come up with the cash to pay your tax bill. (For help, read When You Can't Pay Your Taxes On Time.) What to do to more closely pay the right amount of taxes during the year:
- Adjust your wage withholding by filing a new W-4 with your employer. If you want less money withheld, increase your allowances on the form; if you want more money withheld, decrease your allowances.
- Opt for voluntary withholding on certain payments (e.g., Social Security benefits, unemployment compensation). This is done by filing Form W-4V with the appropriate government agency making the payment (not with the IRS).
- Pay estimated taxes. If you have investment income or other income that is not subject to withholding and you cannot cover your projected tax bill by increasing wage withholding, you need to make four estimated tax payments for 2015. Consider setting up a separate savings account to squirrel money away for these payments.
If you can afford to defer the receipt of income to a future year, you've postponed taxes. And if you're in a lower tax bracket in the future, you'll ultimately save taxes. Some easy deferral options:
- Buy U.S. savings bonds. The interest can be deferred until you redeem the bonds or they reach final maturity (30 years for EE and I bonds). While the interest rate currently isn't very high, these bonds are the safest investment you can have. What's more, the interest can become tax free if bonds are redeemed to pay qualified education expenses for your child.
- Use deferred compensation plans. Employers may offer the option of postponing the receipt of year-end bonuses and other compensation until retirement. The trade-off: The payment cannot be secured so if the company goes under you can lose the deferred income.
Tax rules are continually changing, with new opportunities presenting themselves from time to time. Stay alert to changes in legislation, court decisions or IRS pronouncements that can be helpful to you, which can be done simply by following developments in the media. It is also helpful to develop an ongoing relationship with a tax advisor who can share new developments with you in a timely way.
Schedule appointments with your tax advisor at key times: mid-year, year-end and whenever you are about to make a major life change that can impact your taxes (e.g., marriage/divorce, birth of a child, sale of a business, relocation to a new state). (For more, see 7 Mid-Year Tax Moves.)The bottom line
The more proactive you are now about income taxes, the better off you'll be when it comes time to file your return next April 15.