Last Minute Tax Planning Tips
Greetings, and Happy Spring (sort of) to everyone! Someday in the hopefully not-too-distant future, the temperature will rise above freezing, snow will melt, flowers will bloom…
But in the meantime, I am pleased to share my Financial Planning Tips email for this month: Last Minute Tax Planning Tips.
As the April 15 tax filing deadline approaches, it can be very advantageous to take last-minute planning steps, and to focus on accuracy and completeness of tax returns and supporting documentation. Below are a few things to consider as you look to wrap up your 2013 taxes:
Money Saving Ideas
Contribute to an IRA or HSA plan
For tax year 2013, you can contribute up to $5,500 ($6,500 if age 50 or older) to an IRA. An IRA can be a great retirement savings vehicle, and anyone can contribute to a traditional IRA. Whether you can contribute to a Roth IRA (where your money grows tax free) depends on your income; contributions by higher income taxpayers to a Roth IRA are limited or not allowed.
Contributions to a traditional IRA may be tax deductible, depending on your income, and whether you participate in an employer’s retirement plan.
NOTE: IRA contributions for 2013 can be made until April 15, 2014.
Health Savings Account (HSA) contributions
If you bought your own health insurance in 2013 and it is HSA-compatible (those of you who attended my Health Care Reform class will know what that means!), you may make a tax-deductible contribution to a HSA account (regardless of how high your income is), which provides tax savings on eligible health care expenses, as well as tax-free growth on earnings (interest, dividends) of HSA funds. 2013 HSA contribution limits are $3,250 for individuals and $6,450 for families. Like IRA contributions, HSA contributions for 2013 can be made until April 15, 2014.
NOTE: The use of HSA accounts should increase significantly in 2014 and beyond because of the Affordable Care Act (“Obamacare”).
Child Care Expenses
If you have kids and you pay for daycare so you can work outside the home, you may be eligible for the Child and Dependent Care Tax Credit. The maximum credit is $3,000 for the first child, or $6,000 for two or more children. The credit amount that any taxpayer is eligible for is highly sensitive to income – the higher your income, the lower the eligible credit. And note with a tax credit, taxes are reduced dollar for dollar, making credits much more valuable than deductions.
So, if you have eligible daycare expenses, don’t miss out on this potentially valuable tax savings benefit!
Check for Donations
For one last-minute tax tip, dig through your bank statements and receipts for any donations you made to charities last year. These donations can really add up, and are often overlooked as tax deductions. Remember, however, that to write off any charitable contributions, you have to itemize. Often, if you own a home, mortgage interest and property taxes (as well as State income taxes) add up to enough to surpass the standard deduction – $6,100 for individuals and $12,200 for a couple married filing jointly in 2013 – and allow you to itemize deductions.
It’s also important to keep good records. Larger charities will typically send you a year-end statement of your deductions, but smaller charities often don’t, so you’ll want to keep a copy of your receipts and/or bank or credit card statements.
Check for Accuracy and Reasonableness
Lastly, it is important to actually read through and check your tax returns and supporting schedules for accuracy and reasonableness before filing. Follow up on any errors or anything that doesn’t look right, e.g., your taxes are much higher than the prior year; your deductions seem too low; your Social Security number is incorrect. With most tax returns now prepared using software, these important steps are often overlooked.
If you are not ready to final your final returns by tax day, consider filing an extension. But be careful – to avoid penalties, you will still have to pay by tax day (April 15 for most people) at least the amount of tax you will ultimately owe…so if you don’t have your final tax liability calculated by tax day, consider making a conservative (high) payment with your extension. It’s better to get a refund back later than to get hit with penalties.
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