You would be thinking OMG tax year is behind us, so why this article on taxes, but the reality is that you would be better prepared for filing your taxes this year if you started early and this is a good time to begin. So here goes!
Don’t get euphoric over tax refunds; curb payments instead
Getting a tax refund may be a joyous and welcome event but just think for a moment – “am I not getting back the money that I had no business parting with in the first place?” If your refund averages around $2,550 that’s a kind of heavy overpayment don’t you think?
Uncle Sam obliges you to pay your taxes, period, but he does not insist that you pay him a cent more than what is due. The better approach would be to take a copy of your latest tax return and use a pencil to key in the figures as they can be roughly estimated for the current year. Use the IRS Withholding calculator software and run your numbers through that to get a clearer picture of what you owe the government and pay only that amount.
Look at the overall withholding for the previous year and calculate whether your withholding amount is correctly calculated; you might be overpaying. In that case ask the HR guys to reduce the withholding this year. Repeat the same process with your state taxes.
If you get a windfall payment use it to boost retirement savings
Don’t rush to the nearest mall after landing your refund; plough that amount into a retirement savings plan like the 401k or IRA where you get tax benefits.
If you are employed you there are 401k and Roth IRA plans, the difference between the schemes being the way taxes are treated. Remember that in the traditional plan you are deferring taxation till after retirement by accumulating tax advantaged savings today. The Roth IRA moved here is just the opposite – you agree to pay necessary taxes today while you build the fund and take away tax free withdrawals when you retire. Basically, people that are high income earners will opt for traditional plans that allow them to postpone paying their taxes in the present so that more money is available for current expenses.
Pumping money into healthcare plans
Combining a health insurance plan and a health savings account (HSA)
This is a viable option; the insurance plan you select should have low premiums but high deductibles and then you can use the HSA to save funds for meeting those deductibles and miscellaneous expenses. Remember that the HSA is beneficial as it brings down taxable income.
Using a Flexible Spending Account (FSA)
The FSA gives the same tax benefits as the HSA but there are restrictions like maximum annual contribution of $2,500 and only $500 being allowed be carried over, so one has to estimate in advance the amount that you need for healthcare treatment (a bit tricky no doubt).
Consider buying a house
It’s a no brainer that renting is a stress free option for Americans but buying a house brings the twin benefits of asset accretion and tax savings. Remember that for homes mortgage interest and property taxes are both deductible. Grab a copy of your IRS Schedule “A” sheet and do the calculations to find out whether your cash flow is impacted unfavourably compared to renting. This will help you decide whether it is more affordable to rent a home or to buy one.
An emergency fund is useful for meeting retirement blues
Retirement will be full of anticipate and unexpected expenses. Stop thinking of your retirement fund as the emergency fund in your life; you need another fund that will stand by you when things get messy. Early withdrawals from retirement plans that violate rules will result in the imposition of stiff penalties. At that moment when you grab retirement money unthinkingly for urgent needs the situation could become financially tricky unless you have back up funds to push you through.
Grab the 529 plan to save taxes on education savings
If you are aiming to push your child through college you can’t do without a 529 plan. In some states they allow you to take deductions on your education oriented savings and a few others offer tax credits.
As you may have surmised there are myriad ways in which an intelligent and conscientious person can promote savings and secure his future while managing his taxes brilliantly. From now on, whatever you do you will be reassured knowing you have made an informed choice.