Tackle Taxes with Powerful Preparation
This year is quickly approaching its end, and the time we have to get all of our financial ducks in a row is running out. While filing end of the year taxes may seem like one of the most daunting tasks to tackle, there are several things you can do to prepare. Then, when it comes time to see a financial professional, you are already ahead of the game.
Standard vs. Itemized Deductions
It is possible to boost your tax situation by comparing standard and itemized deductions. If your current itemized deductions are more than your standard deduction, you can save tax dollars by itemizing.
If your itemized deductions are close to your standard deduction, consider shifting some of your deductions to 2016, when itemizing may be more practical. On the other hand, if you know that you will not have as many itemized deductions in 2016 as you do this year, consider shifting some deductions from next year to this year. For example, if you cannot itemize this year but can next year, make your annual charitable donation in January instead of December.
Make Flexible Spending Work for You
Your employer may offer fringe benefits through a flex plan by which some of your pay is set aside for childcare or medical bills. This money avoids both income and Social Security taxes; however, you either use it or lose it. Decide how much to contribute early on, and plan on using it before the end of the year to avoid forfeiting the excess. Check to see if your employer has taken advantage of the grace period permitted by the IRS, which allows you to spend money from 2015 as late as March 2016. Otherwise, use up the funds in your account with last minute trips to the doctor’s office or drugstore.
Practice “Loss Harvesting”
A key year-end tax strategy is selling investments like stocks and mutual funds in order to realize losses. Those losses can then be used to offset taxable gains you may have come across throughout the year dollar for dollar.
In the event your losses are more than your gains, up to $3,000 of excess can be used to wipe out other income. If your excess loss is more than $3,000, it can be carried over to next year, allowing you to offset any 2016 gains.
Contribute the Maximum to Retirement
Since retirement accounts compound over time free of taxes, they can grow to a substantial sum. Company-sponsored 401(k) plans are often the best plan because employers tend to match contributions. Try to contribute the maximum, or at least the amount that will be matched by your employer.
With an IRA, the sooner your money is in the account, the sooner it has the potential to grow tax-deferred. You can also reduce your taxable income for the year by making deductible contributions. Remember that Required Minimum Distributions must be made following the year in which you reach age 70 ½, and failing to take out enough results in 50% excise tax on the amount you should have withdrawn. Therefore, check your distributions and ask your IRA custodian to withhold tax from the payment upon withdrawals in order to avoid the hassle of making quarterly estimated tax payments.
Considering these simple steps now will save you time, hassle, and money as 2015 comes to a close. Having a good handle on your tax situation will also better prepare you to meet with an expert who can then guide you in your decisions, help you avoid running afoul of IRS rules, and set you up for success in 2016. Contact Financial Asset Management Corp. for more help in preparing for Tax season!