As spring time gets closer and the threat of winter becomes less and less, the tax man approaches and you may be scrambling to make sure you have all of your financial information in order. While keeping good records is a big part of paying your taxes properly, there are several other items to consider during tax season that shouldn’t be left out in the cold.
Maximize Your Itemized Deductions
No one likes paying taxes, and there’s no reason to pay more than you should in any given year. One of the best ways to make certain that you pay as little in taxes as possible is to get as many tax deductions as you can. Donations to charities like Goodwill, your church, or the Salvation Army may be deducted, as can work-related expenses such as meals with clients, travel to and from work-related events, and the cost of equipment and supplies. By maximizing your deductions (there are caps on how much can be claimed in a given category and limitations based on your income) you may be able to reduce your tax bill.
Deduct Your Investment Costs
Do not overlook your ability to write off investment expenses. When investments turn a profit, the profit has to be claimed as income, but the other side of that coin is that when they represent a cost, investments can be written off as an expense on your taxes. Even if you only have a few small investments the overall costs they represent can save a lot of money when it comes time to turn in your tax forms. You may have to do a little homework and review your statements since this bit of information does not arrive in your mailbox with your other forms.
Did you fully utilize your company retirement plan?
A 401(k) allows you to deduct pre-tax dollars throughout the year which can help reduce your taxable income. It may be too late to change for the return you are currently working on, but take time now to change things if needed for this year.
Withholding The Correct Amount (Why Refunds Are Bad!)
Everyone has faced the decision of whether to have the minimum amount of taxes taken out of their paychecks, or to take out more for taxes in order to ensure a bigger refund later. While the idea of a bigger tax refund might seem appealing at a glance (since it means you get a lump sum payment that you can’t have spent during the year) it’s actually the worse of the two options.
Why is it worse? It’s quite simple, actually.
If you have more money taken out of your checks and withheld for taxes then you are essentially saving up for a year. The money that comes out of your check doesn’t earn any interest though, and you can’t use it until the government mails out tax refunds next year. The money that you earned is being set aside in the event that you might need to pay more in taxes. If you opt for the minimum amount of taxes being taken out of your earnings it’s possible you’ll have to pay a little bit extra when April rolls around. On the other hand though, all that extra money can sit in your personal savings account accruing interest rather than sitting in the government’s coffers waiting to finally come back to you, the person who earned it.
Lastly, your list of things to consider during tax season may need to include a tax professional. These experts on tax law and tax preparation may save you money and can make sure that you are properly protected.
FINANCIAL ADVISOR WARNING! Are you being ripped off? Call 281-907-5136 to hear the 5 Costly Misconceptions about Financial Planning. Byron W. Ellis, CFP®, CLU®, ChFC®, CRPC®, is a CERTIFIED FINANCIAL PLANNER™ professional and Managing Director of United Capital Financial Advisors, LLC, a Financial Life Management firm. The information contained in this article is intended for information only is not a recommendation, and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances. The opinions expressed herein are those of Byron Ellis and not necessarily those of United Capital Financial Advisors, LLC.