1. Get organized
If you spent last April 14th rummaging through drawers and turning over shoeboxes trying to find all of the receipts and documents needed for your return, you’re not alone. Many people fail to get organized until the last minute. However, being disorganized isn’t just an inconvenience, it can actually end up costing you money. According to the General Accounting Office, the average taxpayer overpays the IRS by hundreds of dollars each year by missing out on applicable deductions. Instead of spending April 14th ransacking your house and possibly missing deductions, set aside an hour or two now to get organized. An easy way to organize tax documents is to simply get yourself a file box and create three folders: Income, Deductions and Investments. Establish this as a central location where everyone in your household can put tax-related records all year long. Even if everyone in your family just ends up throwing the documents on top of the box, you’ll still have them all in one location. This is also a good spot to place your previous year’s tax return in case you need to reference it come next April.
2. Be aware of changes
The tax code changes every year, and that is especially true for 2013, which has brought a host of modifications. Some of the changes that occurred in 2013 include the payroll tax returning to its 2010 rate of 6.2 percent, an increased social security tax and the healthcare mandate, which is set to begin on October 1st. 2013 has also brought numerous changes for high-income brackets, including higher medicare payroll tax and a reduction in the number of allowed deductions. These changes can affect everyone differently and some not at all, so it is important to do your research and find out exactly what changes have taken place and how they will affect you. You can find out about tax law changes, as well as helpful tips and IRS announcements all year by subscribing to IRS Tax Tips through IRS.gov or their mobile app, IRS2Go.
3. Reevaluate your withholdings
Your tax return from last year is a good indicator of whether or not you’ve been withholding the proper amount of taxes. If you came up short, you may want to increase your tax withholdings for these last few months of the year to ensure it doesn’t happen again this April. On the other hand, if you received a large refund, you may want to consider reducing your withholdings. Although everyone enjoys the feeling that comes with receiving a large refund, that was your money to begin with—and by overpaying your taxes, you’ve basically been giving Uncle Sam an interest-free loan. If you received a refund of $3,000 last year, which equates to $250 a month, you could have invested that $250 instead of letting the government borrow it for free. Even if you just managed to yield a 4 percent return, you could have ended up with an extra $60 at the end of the year!
I always like to take a weekend each year just to clean out my closets, garage and cabinets and donate all of the items that I no longer need or want. It always feels good to help out others and get my house clean while doing so. It also feels good when tax time rolls around and I can get that bill down! Donating items or cash is a great way to lower your tax bill, but there are a few requirements to keep in mind: you must donate to a qualified charitable organization and you must receive a written record for any cash donation and merchandise donations of $250 or more. To find out if the charity of your choice is a qualified organization, you can use the search tool on the IRS site. Just remember, if there was quid pro quo involved, you can only deduct the amount that exceeds the fair market value of the item you received. That means that those 12 boxes of girl scout cookies that you bought to help out the local chapter cannot be deducted on your taxes.
5. Make energy improvements to your home
If you’ve been considering making energy efficient improvements to your home, this is the year to do it. The Residential Energy Efficiency Tax Credit, which offers a $500 credit for such improvements as select insulation, water heaters and central air conditioners, is set to expire at the end of this year. This credit actually expired at the end of 2011, but the American Taxpayer Relief Act of 2012 retroactively renewed it, giving you one last chance to make those improvements. The improvements must be made by December 31, 2013, and you are only eligible to receive the maximum credit of $500 once between 2011 and 2013. This means that if you replaced your air conditioner in 2011 and received the $500 credit then, you cannot get the credit for making another energy improvement in 2013. To get all of the details on the Residential Energy Efficiency Tax Credit, including a list of eligible improvements, visit the U.S. Department of Energy.
6. Start saving if you think you may owe additional taxes
There are numerous reasons you could owe taxes in April—such as not withholding enough or having a lot of untaxed income—but if you’re worried that you may find yourself facing a large tax bill come April, now is the time to start saving. Although it’s no fun setting aside money each month for something as mundane as paying the IRS, it surely beats having to pull out the plastic to charge your taxes, racking up who-knows-how-much in interest while you try to pay it off. Not only will you possibly accrue interest on these charges, but the three credit card companies that the IRS accepts credit card payments through each have their own fees ranging from 1.89 to 2.35 percent of your tax bill. That means that if you owe $1,000, you could get hit with another fee as high as $23 just for charging it! Instead, start saving what you can now—you’ll thank yourself later.
7. Fund your 401K
Funding your 401K isn’t just good for your future, it’s good for your tax bill! Setting aside that money now means that you’re reducing your taxable income, thus reducing your taxes. Let’s look at this example taken from TurboTax: Let’s say that your salary is $35,000 and your tax bracket is 25 percent. When you contribute 6 percent of your salary into a tax-deferred 401K, which would be $2,100, your taxable income becomes $32,900. The income tax on $32,900 is $525 less than the tax on your full salary. That means that you just saved an extra $2100 for retirement and you saved yourself $525 this year! Just remember that there are limits on how much you can save. For a traditional 401K, The maximum contribution for a traditional 401K is $17,500, and for a SIMPLE 401K the max is $12,000.