With July 15th behind us, taxes are probably the last thing on your mind. They shouldn’t be. Making the right tax moves now–even after tax day–will help improve your tax situation next year. At a minimum, planning now could spare you a lot of grief when taxes are due next year.
So here are 10 tax moves to make now, after Tax Day has passed:
Table of Contents:
1. Use Your Tax Refund Wisely
This tip won’t help much for next year’s taxes, but if you got a refund this year, use it well. You may decide to pay down debt or invest it. And you could even have a little fun with a portion of it.
But don’t just blow your refund–particularly if you have non-mortgage debt. If you have car loans, credit card debt, or other high-interest debt, use your refund to pay it down. This will maximize your savings by reducing the interest you pay.
Alternatively, use some of the cash to fund this year’s IRA or to boost your emergency fund.
Related: 10 Ways to Use Your Tax Refund
2. Re-evaluate Your Tax Withholding
Whether you got a refund or owe taxes, now is the time to re-evaluate your withholdings at work. The goal here is to come out as close to $0 owed or refunded as possible.
Whether your employer is withholding too much or too little, now is the time to address the issue. It’s early enough in the tax year that you can make adjustments now to better align the money coming out of your paychecks with the actual money you owe. While you do this, be sure to evaluate any major changes in 2020 that may alter your tax liability this year compared with last.
To adjust your tax withholding, you’ll need to ask your employer for a W-4 Form. The form has been updated for 2020. Most notably, “allowances” have been eliminated on the new form. And it includes an extra worksheet to help taxpayers who have multiple jobs more accurately predict their withholding. See the new form.
3. Increase Your 401(k) Contributions
If you’re offered a 401(k) through your employer, you need to be taking advantage! Not only is a 401(k) a great way to save for retirement, but it can lower your tax bill today. A 401(k) account is a pre-tax retirement account, meaning that all your contributions are tax-deductible.
For 2020, the IRS has raised the annual contribution limit for 401(k) accounts by $500 to $19,500. So even if you maxed out your contributions last year, you can save a little more in 2020. The catch-up contribution for employees over 50 has also been increased from $6,000 to $6,500.
4. Stash Money In Your IRA
If you plan to contribute to an IRA, you can wait until you file your 2020 taxes next year to make that contribution. If you have cash set aside to do that, this last-minute approach is fine.
For many, however, the best option is to make quarterly or monthly contributions throughout the year. It’s easier to deal with your IRA contributions as an expense this way. After all, $6,000 (or $7,000, if you’re at least 50) is a lot of money.
So figure out how you’re going to make those contributions, especially if IRA contributions are a major part of your tax and retirement planning.
5. Fund Your HSA
If you have a Health Savings Account, plan for those contributions, too. This is a fabulous vehicle for not only paying for health costs but ultimately saving for retirement. If you have an HSA, take advantage of it.
Your contributions can reduce your tax liability, and help you plan for future medical expenses. However, to qualify, you’ll need to be enrolled in a High Deductible Healthcare Plan (HDHP). If you don’t have an HSA, check out this article to get more information on them.
Money Guide: Health Savings Accounts
6. Plan Your FSA Contributions
Like an HSA, a Flexible Savings Account (FSA) is a savings account offered by employers allowing employees to save pre-tax money for medical expenses. Unlike an HSA, you don’t need to be on a High Deductible Healthcare Plan (HDHP) to contribute to an FSA.
A less common FSA, but valuable for parents, is the Dependent Care FSA. If your employer offers this type of account, it could help you avoid paying taxes on up to $5,000 of child care expenses.
If you do plan to fund an FSA, don’t contribute much more than you think you’ll be able to spend during the year in medical expenses (or child care expenses). Many FSAs don’t allow any funds to be rolled over to the next year. And, at most, only $500 can be carried over according to IRS rules.
7. Contribute to a 529 College Savings Plan
College is expensive. According to the College Board, the average annual cost of a 4-year public university is more than $10,000. And annual tuition and fees jump to over $35,000 for private universities.
No matter what type of school you or your child plan to attend, that’s a lot of money that you’ll need to cough up. But stashing college money away in a 529 plan could shield those funds from a lot of taxes.
First, 529 plan funds grow tax-free. And the money is spent tax-free as long as the funds are used to pay for education expenses. Tax-free withdrawals are currently capped at $10,000 per year.
Unfortunately, your 529 plan contributions are not tax-deductible on your federal tax return. However, over 30 states do offer deductions or credits that could lower your state tax liability.
8. Track Your Medical Expenses
If you itemize your deductions, you may be able to deduct the medical or dental care expenses that you pay for yourself, your spouse, or dependents this year. Currently, you can deduct medical expenses that exceed 7.5% of your AGI.
So if you have an AGI of $50,000, you can begin to deduct your medical expenses once they exceed $3,750. If you had $7,000 in medical expenses, you could deduct $3,250 of those medical bills on your taxes.
Make sure that you file all your medical bills and receipts away in a safe place. If you do take a medical expense deduction, you’ll want to keep that documentation handy as proof in case the IRS was to come knocking down the road.
9. Find Worthy Charitable Causes to Support
Donating to charities not only allows you to support causes that you believe in, but your contributions could also lower your taxes this year. Generally, you can deduct up to 50% of your AGI. So if you earned $80,000 last year, you could deduct up to $40,000-worth of donations to qualifying charities.
Property donations are also deductible, but you’ll need to determine their fair market value. And it’s important to point out that you can only deduct your charitable donations if you decide to itemize. Learn when itemizing your deductions makes sense.
10. Organize Your Paperwork
If you’re anything like me, you get to tax time and are aggravated because you didn’t plan better throughout the year. You’ve got tax paperwork everywhere and it’s not organized at all.
For instance, we give a lot of household items to charities. They call us and then pick up our donations at our home. It’s an extremely convenient way to give back.
At tax time I’ll gather up all those receipts and one of them will inevitably be blank. The charities don’t itemize the items you donate and tell you what they’re worth. You’re supposed to do that. So this year, I’m trying to do better by writing down what we give and estimating (conservatively) its value on the day we give something away.
But that’s just one example. In my case, I also run businesses, so I’ve got expenses to track. The paperwork gets a little overwhelming. So if I stay on top of it throughout the year, things are much, much better for me at tax time.
A great tool to help with the organization is a paper scanner. You can scan just about anything to PDF, which I then save in Dropbox in a folder for taxes.
But here’s the key. You have to start organizing now. If you wait until next year, you’re just giving yourself more headaches when you file your taxes. Think about this now so that you can make next year’s filing easier.
If you take advantage of these 10 tips now, you’ll have a smoother time filing your taxes next year. And, hopefully, you’ll also save more money.