It’s March again. Which means you only have one month left to file your taxes. Banks and employers are already frantically at work tallying last year’s earnings and taxes so they can ship those W-2’s and 1099’s out the door in time. What can you do to prepare for tax season early?
Here are 5 tips you can use now, some will help you with last year’s return and some will help you get a jump-start on the current year’s tax bill.
1)Invest in your 401(k) or IRA
What? You don’t invest in your company’s 401(k), or if you’re self-employed you don’t have an IRA? That’s just flushing good money down the drain, literally. The IRS actually ‘pays’ you to save for your own retirement, in the form of tax savings on the current year’s earnings.
What’s so great about this, besides the obvious immediate tax benefit on your contributions, which for 2012 was capped at $17,000, is that you end up saving money in the long run because it is very likely that as you get closer to retirement age you will be in a lower tax bracket than you were in your peak earnings years. And if your employer matches your 401(k) contribution – that is free money. No strings attached. There is no better deal on the market right now than to ensure that you invest in your 401(k) or IRA as much as you can possibly afford to each tax year.
2) Give it away!
Charitable donations are a great way to see savings off your tax bill. But be sure you do it properly. These days you must have a receipt to claim it. A canceled check or credit card statement count, but you need to save a copy of that with your tax folder (whether kept electronically or in physical form). Additionally, most people underestimate their non-cash donations to charities.
The recommendation is to document each individual piece, rather than listing it as a bulk item (“kid’s clothes” would be bad: “5 toddler’s shirts, 6 toddlers pants” would be better). There are also great savings to be had by giving “cash gifts out of your estate” to your dependents. Doing so while you are still around to decide who gets what saves everyone tax grief – estate taxes are known to be the biggest and most depressing of all tax bills.
3) Points on refinancing your home
If you refinanced your home in the previous tax year, or are thinking about doing it in the current tax year, don’t forget that you can amortize your loans and then annually deduct a portion of the ‘points’ that were incurred as part of the closing process. Additionally, when you refinance you can deduct all of the previously unamortized points from a prior refinancing. It gets confusing – but don’t let that stop you from taking advantage of this benefit. Every dollar counts on your tax bill!
4) Education expenses
There are two different ways to take advantage of what would be considered ‘education expenses’. One is for actual educators (teachers) who can deduct up to a specific amount for any supplies they paid for out of pocket for their classrooms. If you’re a teacher, don’t forget to track these and deduct them! The second way is for your own higher education expenses. If you are continuing your education, you may be eligible for certain tax deductions (depending on your filing status and annual earnings). For example, in 2012 you could deduct up to $2,000 by using the Lifetime Learning Credit; possibly more if you are eligible to use the American Opportunity Credit or the Hope Credit.
5) Legal and tax preparation fees
Do you do your own taxes? Or do you hire someone to do them? If you do them yourself, do you purchase tax software every year to assist and guide you? Don’t forget that you can deduct these costs on your itemized tax return. Let’s hope you didn’t have any major legal fees this past tax year, but if you did, many of them are deductible as well.
Be sure you look into what you are eligible to deduct and include everything that you are entitled to.