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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