Last week’s blog was about organizing your records to save time next tax season. This week, we focus on the steps you can take now to save money next tax season.
In the next few weeks, while you have all your 2015 tax information together, take time to assess your situation and look for opportunities to lower your 2016 income taxes, increase cash flow, and build wealth. People often overlook these four steps they can take now:
Getting a big refund? Why give Uncle Sam an interest-free loan? Get that money back in every paycheck so you can use it throughout the year. Work with your payroll office to increase your personal exemptions and your take-home pay.
Have to pay with your return? Owing a small amount is okay. Avoid underpayment penalties by withholding or paying estimates totaling the greater of either 100% of your prior-year tax liability or 80% of your current-year tax liability.
Are you maximizing pre-tax retirement benefits? Participating in employer retirement plans reduces your tax bill and saves for your retirement. Plan contributions are made pre-tax, which reduces the tax withholdings from your paycheck. The reduced tax withholding partially offsets the contribution amount.
Big bonus — plans with employer matching give you an immediate return on your investment.
Should you buy a home before interest rates go up? Tax season is the perfect time to assess your home buying potential. Look at paying $1,000 a month in rent or a mortgage payment. For a taxpayer in a combined 40% marginal tax bracket where 80% of the mortgage payment is deductible interest and taxes, the after-tax cash impact of that $1,000 mortgage payment is $680.
Defer Income and Accelerate Expenses
Looking for other planning options? To the extent possible, push income into next year and pay deductible expenses this year. Expenses to consider include education, elective medical procedures not covered by insurance and capital transactions.
Investing time during this tax season to assess your situation and make some adjustments can really pay off later. Lower your 2016 income taxes, increase cash flow, and feel good about your future.