Monday, April 7, 2014

There are ways to reduce your tax bill after year’s end

If you have not finished your taxes, then join the crowd. The IRS typically receives 20 percent of all returns within the last week of the April 15 tax deadline. Given there are around 150 million individual income tax returns filed in a year, this represents almost 30 million returns.

While there are fewer opportunities to reduce your tax bill after year-end, there are some. While tax planning after the end of the year can help you reduce your tax liability, it can also make the tax-filing season cheaper and easier and give you a jump start on next year’s taxes, as well.

Some tips:
If you are not self-employed, the No. 1 tax savings opportunity after year-end is to fund an Individual Retirement Account (IRA). Without getting too in depth about the intricacies of IRAs, in general, if you have earned income from a job or self-employment and are under the age of 50, you can contribute up to $5,500 into an IRA for 2013. This contribution must be made by April 15 without extensions.

If you are over the age of 50, you can contribute an additional $1,000 via the catch-up provision associated with IRAs. If you are a non-working spouse, you can utilize the earnings of the working spouse to allow a contribution to be made in your own IRA. Whether the contribution is deductible, and thus saves you taxes, will depend upon your filing status, your adjusted gross income and whether you and/or your spouse are covered by a retirement plan at work so please check with a tax professional on this.

If you are self-employed, an even larger contribution can be made via an SEP IRA. Unlike the Traditional IRA, these contributions can be made up until the tax filing deadline, plus extensions. This is the only type of retirement account that can be set up after year-end for a self-employed person and thus is very popular with those who did not plan accordingly. In general (and not exact), to find your allowable contribution, multiply the net earnings from your business by 20 percent. If your self-employed earnings exceed $255,000, you will be limited to a maximum $51,000 SEP contribution. This is an excellent tool for those who are self-employed without employees. If you have employees, the IRS requires a contribution for the employees at the same percentage made for the owner. There are qualification rules associated with this for employees which can be found in IRS Publication 590.

In addition, make sure you are organized. Many taxpayers simply overlook deductions because they can’t find them or don’t track them very well. A good system, whether manual or via a computer program such as Quicken or, can make a world of difference between owing taxes and getting a refund.

If you will be getting a large refund, you may wish to put this money to good use on something that will make a difference in your life. Consider paying down credit card debts; applying the refund to a long-term goal, such as education for a child; or making an extra mortgage payment on your home. But don’t simply waste it on some impulse purchase that will add no real value once you take it home. If you are receiving too big a refund or owing too much, consider changing your withholdings to prevent this and to allow your money to better work for you.

While taxes may not be your favorite activity, taking simple steps can make them much easier and less expensive for you, allow you to save money even after year-end and use any refunds wisely.

Life is a journey; plan for it.

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