Tuesday, December 29, 2015

Tax preparation is an oxymoron

Tax preparation is an oxymoron
An oxymoron is a figure of speech that uses seeming contradictions. "Civil war" or "jumbo shrimp" are popular examples of an oxymoron. At the beginning of each year, we typically see ads on TV, online and via email for “tax preparation.”
At that point, the tax year is over and now the deadline to memorialize the tax activity of the prior year is April 18 for 2016 (but can be extended until Oct, 15.) It is in this first quarter of the year when people of all ages begin to gather their tax documents to prepare their tax return.
But the contradiction is “tax preparation” should be completed before the year ended, not after. If you are new to filing taxes or have been filing your own taxes and taking the standard deduction, you may not realize the advantages that might be gained with a little knowledge and year-end planning. Here is a tax preparation“to-do listthat needs to get done by Dec. 31:
  • Fatten your employer-sponsored retirement plan  Tax-deferred investing is a smart choice because it allows your money to grow tax-free until you withdraw it. Maximize your 401(k), 403(b), 457, and TSP contributions, which are $18,000 or $24,000 if you will be age 50 or older in both 2015 and 2016.
  • Consider Roth IRA conversions  If you have a long time until retirement, chances are good that taxes will be higher then than now, and a Roth conversion can help you potentially save a lot in taxes in your future retirement. If you are considering converting part or all of your traditional IRAs to a Roth IRA, keep in mind the immediate tax consequences and additional rules and potential penalties. You will owe income taxes for 2015 on any amounts converted by December 31.
  • Contribute to your health savings account  If you are covered by an eligible high-deductible health insurance plan, using a health savings account to save for your future medical expenses can help you trim your taxes both today and in the future. Money that you contribute is tax-deductible, earnings accumulate tax-free, and withdrawals are tax-free if used to pay qualified medical expenses. You have until April 18, 2016, to contribute and claim a deduction for 2015. The maximum contribution for 2015 is $3,350 for self-only coverage or $6,650 for family coverage.
  • Clean out your closets and snag a tax deduction  Clothing and household goods that you donate to charity by the end of the year may add up to a tidy tax deduction for you if you itemize deductions. Be sure to keep your receipts and use services like www.ItsDeductible.com to identify value for your goods.
  • Take required minimum distributions  RMD is not just required for people over 70.5. No matter what age you are, you might have inherited an IRA or a Roth IRA from deceased parents, grandparents or any non-spouse that require a minimum annual distribution. It is important to note that even though inherited Roth IRA’s are tax-free when distributed, both traditional IRA and Roth RMD minimums must be taken out by Dec. 31. The Internal Revenue Service penalty for not taking a required distribution is steep: 50 percent of the required amount. Be sure to discuss with a financial professional experienced in IRA tax laws to understand your requirements and options.
When first starting out, most people have a tendency to do their own taxes. This is fine if you educate yourself, but, as you can see from the above, there could be many tax strategies and deductions on which you are missing out. For more proactive tips and tax-saving strategies, talk to a tax adviser before Jan. 1.