Money

7 Things to Do Right Now to Save on Taxes This Year

taxesThis summer is a great time to begin thinking about your 2017 taxes. By the time summer starts, there have already been several 2017 pay periods as well as a few months to work through any issues or changes from the previous year. Quickly reviewing your finances can save you hundreds- maybe even thousands, of dollars in taxes.

Review 2016’s Tax Return

Take another look at your tax return to check for errors. If you find any, you will be able to file an amended return. Similarly, see if any deductions were not allowed, and make a note to find the correct documentation this year. Did you owe taxes this year? Consider possible ways to reduce your end of year taxes and eliminate any penalties you may have. Did you have a refund this year? Examine your withholding and see if you can make any changes to get the money back over the course of the year rather than all at once. Any significant life changes (such a marriage or divorce), a change in job situation (receiving a raise or taking a new job, for example), or even coming into an inheritance can affect your taxes for this coming year, so be aware of this as well.

Change Your W-4 or Withholding

If there have been any significant changes to your financial situation, consider filling out a new W-4 form for your employer. The more allowances you claim on your W-4, the less money will be withheld from you by your employer for tax purposes. The correct number of allowances should be added to the form so that when tax season approaches, you are not penalized for underpayment.

Double-check Retirement Contributions

Saving for your retirement now can be beneficial in the long term. An immediate tax break can be found in some retirement plans since deductions can be excludable or deductible. Many employers will even make contribution matches, up to a certain percentage. Making $50,000 per year with a 1% contribution rate moves $500 to a tax-deferred account per year, rounding to about $42 per month. With an employer match, this would increase $500 to $1,000 per year in your retirement tax-deferred account. The money in a tax-deferred account is also not subject to taxation until later, giving you time to build your retirement until you are ready to leave the workforce. This would mean you’d be deferring about $125 in taxes if you use a 25% marginal rate. With a Roth IRA or Roth 401(k) you pay the taxes now, but there are no taxes to pay when you finally cash out your account.

Take your Proper Retirement Withdrawals

Withdrawing money from your retirement account too late or too soon can lead to a penalty. Depending on the retirement account, you may be required to remove a certain amount of money for every year you are retired. If you calculate your estimated required minimum distributions early, you will have a better understanding of the remaining balance in your retirement savings over time.

Add Money to your Flexible Savings Account (FSA) or Health Savings Account (HSA)

As medical costs continue to rise, you may find yourself wondering “Can I claim medical expenses on my taxes?” If you are someone who spends a lot on medical care, whether it be doctor’s visits or medications, you’ll be glad to know that these costs may actually be deductible. The IRS allows you to deduct qualified medical expenses that exceed 10% of your yearly adjusted gross income. If your medical bills surpass this threshold, they can qualify as deductions.

If you want to keep costs even lower, consider adding money to a healthcare savings plan. The FSA can be funded by pre-tax dollars and used for qualifying medical expenses, including copayments and deductibles. This health savings plan does not roll over into the next year, unlike an HSA. When paying for medical expenses with your HSA, the funds are federal income tax-free- meaning that the more money you put into the fund, the more money you can save.

Review Estimated Payments

You should consider estimated payments if you receive any payments that do not have federal income taxes withheld. If filing as an individual, expect to pay estimated tax payments if you owe $1,000 or more when you file your federal income tax return. This primarily applies to those who are self-employed, occasional freelancers, corporation shareholders, taxpayers with significant investments, landlords, or business partners. Using the federal form 1040-ES worksheet, you can calculate your payments from an estimated tax. Keep in mind that with estimated taxes, the year is divided into four periods, and the specific payment due date is determined by the IRS. Be wary of these dates. As always, if you don’t pay on time there are penalties to pay.

Talk to a Tax Professional

If you’re still troubled by taxes, have no fear! Going over your finances with a professional can help you figure out any additional expenses and issues may be facing. Not to mention, talking to a qualified and licensed tax professional during June or July for a quick financial check-up can ensure there will not be any surprises come year’s end. Tax professionals can help determine if you need to make any changes in your withholding, and can answer your questions regarding any financial plans you may have for the future.

By - C.M. Lopez

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3 Comments on "7 Things to Do Right Now to Save on Taxes This Year"

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All of this will be completely unnecessary when we pass the FAIRtax which is a consumption tax instead of an income tax. Since AMAC is headquartered in Florida, it’s employees are very familiar with this. Florida has no income tax; instead we have a sales tax. And the Florida economy is doing very, very well. In fact, the nine states that have a sales tax and NO income tax are all doing well. Something to think about.

“Making $50,000 per year with a 1% contribution rate moves $500 to a tax-deferred account per year, rounding to about $42 per month. … This would mean you’d be deferring about $125 in taxes if you use a 25% marginal rate” — Just to clarify, this example can only ever work for a single person, since their taxable income would be reduced by the standard deduction of $6350 and the 25% bracket starts at $37,950 of *taxable* income. For a married couple filing jointly the 25% bracket starts at $75,900 of *taxable* income so a couple making $50,000 per year would *never* go beyond the 15% marginal rate and only $75 in taxes would be deferred.

A little misleading on the FSA and HSA. You cannot lump them together and interchange the wording. I would not encourage anyone to put money in an FSA unless they knew for sure they will have that much in medical expenses the same year. Also, medical expense deduction only includes expenses above 10%. So you need to spend more than 10% to claim a deduction. The first 10% is not deductible.

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