Spring is a busy time of year here at Financial Finesse. While we are always busy providing financial guidance with passion and objectivity, the tax season and the April 15th deadline provide an extra sense of urgency for many callers reaching out to us on the Financial Helpline. Many of the income tax specific calls we receive can be characterized as information seeking and tend to be reactive discussions. When you think about the tax filing burdens created by a complicated tax code, the IRS can strike fear into hard working taxpayers to try and get things right.
However, other callers seek to go beyond determining if they are interpreting the tax code properly. They are more future-oriented and want to take a proactive step into the realm of income tax planning. Whether you are still trying to get your tax information organized to meet this year’s income tax filing deadline or using this time of year as a proactive start to your tax planning efforts, here are some recent blog posts and resources to help you along the journey:
Should I use a tax professional or tax preparation software? Online tax preparation software is relatively inexpensive and fairly easy to use if you take the time to go through the step-by-step guidance and Q&As. But if you are far more interested in finishing your return rather than finishing it accurately, your tax software may create a “garbage in, garbage out” situation according to my colleague Greg Ward.
How you should do your taxes generally depends on the complexity of your financial situation and the amount of time you are willing to devote to trying to complete your return on your own. If you are not sure if you are cut out to prepare your own returns with some guidance, check to see if you qualify for free income tax preparation services (generally for incomes less than $53,000) or at least kick the tires and give online tax preparation software a free spin. Most tax software packages allow you to start for free and do not require payment until you are ready to file.
What if I cannot file before the April 15th deadline? Time is running out to stay off of Uncle Sam’s naughty list and complete your income tax returns prior to the April 15th deadline. The good news is that if you are unable to meet the deadline, you can request a six month extension.
I have worked with many people that need the extra time to overcome the procrastination demons or simply pull together financial records for rental properties, investments, and small businesses. Some small business owners even use those extra six months to allow for more time to set aside money for last minute SEP IRA or other self-employed retirement plan contributions. Just remember that even if you choose to file an extension until October 15, 2015, taxes are still due by April 15 to avoid paying interest and penalties.
Resource: Pros and Cons of Filing an Extension
Can you give me some last minute tax saving tips? Time is running out to take advantage of a few final ways to reduce your taxable income for 2014. Contributing to a deductible IRA is an option if you are working but not covered by a qualified plan at work or if you are participating in a plan and have income below certain limits. If you have a nonworking spouse under age 70 1/2 and enough earned income, you can make a deductible contribution to a spousal IRA.
Health savings account (HSA) contributions are another excellent way to save on taxes today and for health care expenses now or later in life if you are covered by a high deductible health plan. You can contribute up to $3,300 for individual coverage and up to $6,550 for family coverage for 2014. If you are age 55 or older, there is an additional $1,000 catch-up contribution. Just contact your HSA custodian to see how to make your contribution and verify that it is assigned as a previous year contribution. For both IRA and HSA contributions, the April 15 deadline still stands even if you file an extension so be sure to take action soon.
How can I avoid owing the IRS again or giving them a zero percent loan each year (a.k.a. “tax refund”)? It is essential to go beyond focusing on line 75 (amount you overpaid) or line 78 (amount you owe) on IRS Form 1040. Determining if you are on track to receive a tax refund or will end up owing the IRS in the current year is a good place to start with a proactive income tax plan. In order to make changes to your withholding, you will need to fill out another Form W-4 and provide this form to your employer. However, prior to making any changes to the W-4, you might want to review the IRS withholding calculator to estimate the correct withholding for you and your family’s situation. If you are looking for a second opinion or just want to double check your entries, you can also use the TurboTax W-4 withholding calculator.
How can I reduce my taxes for the current year? Filing your tax return should not be the end of your tax planning efforts but should mark the next step in your 2015 plans. This process of planning ahead requires a quick assessment of where you stand today. To get started with your income tax planning, take some time to get your important financial documents together. Organize your financial statements and have a copy of your most recent tax return on hand.
Remember that the goal should not be to just “get it right” in the eyes of the IRS or just minimize the amount of taxes owed. You will still want to make sure you maximize all potential tax exemptions, deductions, and credits but also consider reallocating investments in taxable accounts to more tax-efficient options. Plan ahead so you can contribute as much as possible to your employer’s retirement plan, IRAs, HSAs, and possibly 529 college savings plans. Give with purpose and meaning to charitable organizations with an added bonus of tax benefits from Uncle Sam for your good deeds. If you start the planning today, you will not have to scramble at the end of the year to find last minute techniques to lower your taxes.
A final word about tax planning
Whether you prepare your taxes using tax preparation software or use the help and guidance of a tax preparer, you should review your tax return and look beyond the bottom line of owing money or getting back a refund. Be sure to make a note of anything on the return that you do not completely understand and use it as motivation to educate yourself about these specific items. The more familiar you become with the information that appears on your tax return, the better positioned you will be to plan to minimize your taxes in the future.