With the days growing shorter and the weeks ticking by, now is the time to put your year-end tax planning and financial strategies into practice. There is not much time, but the steps you take now could trip your tax bill, free up the extra cash and improve your financial situation for years to come. If it seems like each year goes a little faster, you are not alone. When you were a kid, a year seemed to last forever, but now the leaves are flying off the calendar and the end of another tax year is just a month or two away.
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Tax Planning: 7 Things That Will Save You Money
Here are seven things you can do to save money, cut your taxes and make the upcoming tax season more comfortable and less stressful.
1. Recheck Your Asset Allocation
The whole idea of asset allocation is to spread out your risk, but when was the last time you did this critical calculation. The reason asset allocation is so valuable is that different asset classes, i.e., stocks, bonds, cash investments, tend to move in different directions and at different rates.
If the stock market has been on a tear or interest-bearing bank accounts have been outperforming, your asset allocation could be dangerously out of whack. What started out as a 50/50 distribution of stocks and fixed-income securities may now be closer to 60/40 or even 70/30, and the end of the year is a great time to set things right.
2. Calculate Your RMD
If you are age 70-1/2 or over, you have an essential job to do. Starting at age 70-1/2, you are required to take a minimum distribution from your IRAs and 401(k) plans. Aptly called the required minimum distribution, or RMD, this task is something you will have to get used to.
That is because the penalty for failing to take the RMD is among the steepest assessed by the IRS. If you miss your RMD or miscalculate it, you could be on the hook for a tax penalty equal to 50% of the amount you should have taken. That is one you do not want to get wrong.
3. Max Out Your Retirement Plan Contributions
The end of the year is also the perfect time to make those last-minute retirement plan contributions. If you have not already done so, check with your human resources department and raise your 401(k) contribution percentage for next year. Write a check to top off your IRA for the year.
You have until April 15 to finish making your IRA contributions, but why put it off? Make your retirement plan contributions part of your year-end checklist, so you will have one less thing to worry about come tax time.
4. Consider a Health Savings Account Contribution
If you have a high-deductible health insurance plan, you may be able to save on taxes by contributing to a health savings account, or HSA. A health savings account has some significant tax benefits, even if you do not need the money for current health care expenses, so it is worth a look.
Just like an IRA, contributions to an HSA are fully tax deductible, so you get immediate savings on the money you invest. You can also roll the funds over from year to year, so what you put in continues to accumulate until you need them. If you do need the money to pay healthcare expenses like deductibles, copays and non-covered procedures, the funds you take out come out tax-free. You can even invest any extra resources in your HSA in low-cost mutual funds and use the account as an adjunct source of retirement income.
5. Estimate Your Tax Situation
It will be hard to get an exact figure for your tax liability since Congress often writes new rules at the last minute. Even so, you can get a ballpark estimate of how much you might owe, or what size refund you can expect.
By the end of the year, you should know how much you earned in wages, and you should have a pretty good idea how much you made in dividends, interest and other unearned income. Put it all together, plug in your deductions and exemptions and assess your tax situation. If you think you might owe additional tax, now is the time to start squirreling that money away.
TaxSlayer is the easiest way to file your federal and state taxes online. Get started completely for free to maximize your tax return this year.
E-file.com offers free federal tax returns using their basic software. Upgrade for more complicated tax cases. In any case, get your biggest refund fast.
Read how FreeTaxUSA top-rated software, IRS-approved e-file provider can help you get the maximum tax refund in the fastest way possible.
6. Spend Down Your Flexible Spending Account
Unlike your health savings account, the money in your flexible savings account does not all roll over from year to year. You may be able to roll over a small amount, but you must use the remaining funds by the end of the year.
Now is the time to check your FSA balance and think about spending it down before it expired. The FSA is mostly a use-it-or-lose-it proposition, so make your shopping list, find out what the funds will pay for and spend accordingly.
7. Tighten Up Your Budget
Hopefully, you already have a household budget in place, but there is always room for improvement. The end of the year is the perfect time to review your monthly expenses and look for ways to save.
Do you have monthly subscriptions you no longer use? Do you need all those extras on your pay TV or cell phone package? How much did you spend to eat out last month? Asking these questions now could save you a lot of money in the coming year.
The year is quickly coming to an end, and a new one will be here before you know it. With time growing short, you need to take a serious look at your finances and make improvements wherever you can.
The seven areas outlined above can help you make the new year a better, and more financially successful one, than the year just passed.
