Whether you complete your own tax returns or hire an accountant, filing your taxes may not be one of your favorite activities. But filing your taxes does present a good opportunity to get your financial house in order. So, as you sit down to gather and organize your records this year, keep the following tips in mind:
1. Develop a Records Retention System. Having a solid recordkeeping system in place can make it much easier to manage your tax filing each year. To make sure you are not missing any opportunities for tax deductions, develop a system to keep track of your expenses. Create a spreadsheet, a file folder, or use a software program to maintain accurate records all year long. For example, the Everlance app allows you to track mileage and classify it for business or charitable purposes.
2. Maximize Opportunities to Reduce Your Taxable Income. The easiest way to reduce your taxable income is to contribute as much as possible to tax-deferred (or tax-free) retirement savings accounts. For 2017, you may be able to defer up to $18,000 to a 401(k) plan. If you’re age 50 or older, you can make an additional catch-up contribution of $6,000. The annual limit on IRA contributions (Traditional or Roth) remains $5,500, with a catch-up limit of $1,000 for those over 50. You should also be careful not to miss opportunities for tax deductions, such as mortgage interest, business expenses, job hunting expenses, and charitable donations. See this list of overlooked deductions.
3. Review Your W-2 Withholdings. If you typically receive a large refund from the IRS every year, consider updating your employer’s W-2 form to reduce the amount of taxes withheld from each paycheck. Why give the IRS a tax-free loan when you could be putting that money to work for yourself? Conversely, if you typically owe a lot to the IRS every April, you may want to make changes on your W-2 to avoid the pain of writing a large check every year.
4. Focus on After-Tax Returns. When it comes to your investments, the amount that’s left after you pay taxes is the number that really matters. You can improve your after-tax returns by holding assets that pay dividends, interest, or capital gains distributions within your tax-deferred accounts. Paying close attention to the timing of stock option exercises or restricted stock sales can also reduce your tax bill.
5. Incorporate Taxes into Your Financial Plan. Taxes can have a huge impact on your ability to achieve your short-term and long-term financial goals. No financial plan can be considered complete without including the impact of taxes.