Tax season is here once again and for most people, once they are finished filing their returns, it’s outta sight, outta mind. But we would actually do well if we thought of the rest of the time as a kind of tax “pre-season.” That way, you will either avoid an audit or not be caught off guard if the IRS does decide to audit you.
It’s never too early to think about retirement
You can’t get any more provisory than when you start thinking about retirement right now. You can enhance your retirement fund while at the same time reducing your taxable income, thus lowering your eventual tax bill. Up to $16,500 can be contributed to a 401(k) retirement plan, and this money is not considered part of your taxable income. A variation of that would be a Roth 401(k), in which case it is the money that you draw from it during retirement that is tax free. There are also Individual Retirement Accounts (IRA). Depending on certain factors, some, if not all, of an IRA contribution can be deducted. Conversely, a Roth IRA will work similarly to a Roth 401(k).
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Health and childcare
It’s important to take advantage of medical reimbursement accounts, or flex plans, whenever employers offer them. Such plans redirect a portion of your salary (which would then be free of income and Social Security tax) to an account that you can use to help pay for medical bills, saving up to 20 to 35 percent. Likewise, childcare reimbursement accounts at work let you pay for childcare with pre-tax dollars, once again bypassing income and Social Security taxes, and allowing you to save you one-third or more of the cost.
Till taxes do you part
Marrying at the end or at the beginning of the year could mean either a “marriage penalty” or actually help you save on taxes. Also, having one or more jobs between you and your spouse can also influence your tax bill. In the case of a divorce, it is important to bear in mind that alimony is deductible by the payer and taxable income to the recipient, while a property settlement is neither deductible nor taxable. On a related subject, a baby, either born or adopted, can shave off more than $3,000 off your taxable income with an added dependency exemption, and maybe even qualify for a $1,000 child credit.
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It’s better to give
Charity has always been a great way to deduct from your taxes, but make sure to give appreciated stocks or mutual fund shares that you’ve owned for more than a year as opposed to cash. This is because your charitable contribution deduction is the fair market value of the securities at the time of the gift, not the amount you paid for the asset, and the profit is 100 percent tax free. On the other hand, stocks or fund shares that lost money should be sold first, with the resulting cash going to charity after the loss has been claimed on your taxes.
This article is provided courtesy of Sam Burgoon, marketing and social media executive for Credit Season, a personal finance website that strives to help people improve their money management skills and overall finances, while delivering the latest and most relevant news from the financial world. Follow Credit Season on Twitter and connect on Google+ and Facebook.