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As April 15 looms, then passes and becomes smaller in our rear view mirrors, you'd probably prefer to forget about taxes for a while. It's okay to take a breather from all that number crunching, but it is not too soon to be looking forward to next April 15, especially if you're accustomed to throwing it all together at the last minute. You may not be aware of some very important issues to keep in mind.
Validate income tax withholdings and/or estimated tax calculations. Most people enjoy getting that tax refund, but it is best to not overpay in the first place. Put any extra net pay into an investment account, or increase your 401(k) contributions, instead of giving the government an interest free loan. But be careful to avoid painful underpayment penalties. You must withhold and/or pay estimated taxes totaling at least 90% of what you owe for the year. Since the current year tax can be difficult to estimate, you can choose to follow the "safe harbor" rule by paying at least 100% (110% for higher incomes) of the total tax you paid last. The safe harbor is most useful in years when income is expected to be higher than the previous year because even if you owe more tax on April 15, you will not owe a penalty if you pay at least 100% (or 110%) of the prior year total tax (Line 61 on the Form 1040).
Ensure you are taking full advantage of 401(k), IRA or other deferred compensation plans. Contributing to a tax-deferred retirement plan will lower your taxable income and reduce your current year tax. The result is more cash to invest because it has not been reduced by income taxes. Further, the investments will earn and grow without an income tax impact until you withdraw the funds. When you retire and begin to take distributions from the retirement plan, the expectation is that your overall income will be lower and as a result you will pay tax at a lower tax rate. There are strategies involved, so the amount you contribute should be well planned. If you are saving to purchase a home, for instance, you can put money into a 401(k) and save income taxes currently, then withdraw up to $10,000 from the plan without penalty (the distribution is only subject to income tax) if you use the funds as a down payment to purchase a home.
Document everything. Keep receipts for all charitable contributions. A check copy is not sufficient evidence for a donation of $250 or more. You must also keep in your files a letter from the organization stating you received no goods or services in consideration for your gift.
Clean out your closets and the garage. But before you take your discarded items to the local non-profit thrift store, make a detailed list. Take pictures and attach them to the lists. This will provide greater evidence if the IRS questions your charitable contribution deductions. Making a list could also help you to determine that the value of those donated items is much higher than you thought.
Make more money and pay the tax! Have you heard people say something like "I don't want to work overtime because the extra pay will all go to taxes"? That is not correct thinking. Since the tax rate is not 100%, you will still come out ahead to make more money and pay the additional tax. You may, however, pay a higher rate of tax at a higher level of income. The extra work for the overtime pay may not seem worth the effort if you only get to keep 60% of the pay. But before you make that decision, do the math, or check with a tax advisor. You may come to believe it is worth earning the extra pay.
Timing is an important factor in tax planning. Selling stock, buying a house, choosing a date to retire, deciding when to make charitable contributions or making any financial decision has the potential to impact your income taxes and therefore should be planned carefully.
Ask for advice. It is much better to pay for good advice than to make costly mistakes. CPAs, financial advisors and attorneys can save you much more money than you will pay them for their expertise.
Have a good year. Make money and plan well.
Last Updated by Admin on 2013-04-23 04:18:44 PM