Taxes are done, now what? It’s time to think about these 4 things right now.
Tax season has come and gone, and you may be thinking you don’t need to think about taxes again for quite a while. On the contrary, now is the perfect time to start preparing for your 2017 tax return.
With some intentional planning, you can set yourself up for better tax efficiency for this calendar year. So while you may not be very motivated to dive back into a tax mindset, you won’t want to neglect these four things you can be doing right now that can keep more money in your pocket.
1. Participate in your company-sponsored retirement program (especially if they offer a match!)
Make sure you are taking advantage of your company retirement plan. Oftentimes, your employer will also offer a matching contribution up to a certain amount, which is basically free money.
If you are already participating in your company retirement plan, can you contribute more? Ultimately, your goal should be to max out the amount you can pay into retirement. If you got a raise this year, consider living off the same monthly income you were and increasing your retirement contributions with your new funds.
If you aren’t saving 20% of your income towards retirement yet, now is a great time to work towards it. I know that’s seems very high, but the best way to build wealth is to save more money now. So work towards hyper-saving and I am confident your income needs can adapt to prioritize your retirement savings goals.
[RELATED ARTICLE: Small business owner? Be sure to check out ways you can Leverage Your Small Business to Save for Retirement]
2. Adjust Your Withholding
Did you wind up with a large tax refund or owe a lot in taxes last year (+/- $5,000)? Then I imagine your accountant advised you to adjust your withholding. I know most financial advisors recommend that you don’t overpay your taxes because that means you are essentially providing the government with a free loan. However, for some, it can serve as a forced savings discipline whereby the lump sum you receive back at the end of the year can be saved or invested.
Within the limited time frame of 12 months, the potential growth you give up from putting money away each month relative to the likelihood you may not have saved at all is probably inconsequential.
3. Open a Health Savings Account
These high-deductible savings accounts allow you to pay for qualified medical expenses with tax-free dollars. You can max out what you put into it at $6,750 for a family. (See more on contribution limits here.) Health Savings Accounts offer tremendous tax advantages that you can easily take advantage of if this savings tool is appropriate for your situation. These savings vehicles are known for their “triple tax advantage” characteristics.
The triple tax-benefits of an HSA account are:
a. Money goes in tax free
b. Money grows tax free, and
c. Money used toward qualified medical expenses is never taxed
You never lose the money you put into an HSA account, and it can also be used to supplement your retirement income if needed (Some HSA accounts can also be invested in stocks and bonds). In retirement, you would only pay income tax on what you distribute.
4. Make charitable contributions
The government incentivizes generosity by offering tax deductions for your charitable contributions (Trump’s initial Tax reform keeps this around). You can give to a church, alma mater, non-profit organization, political cause, or donate items and time.
Before the end of the year is the time to start planning for any gifts and donations you want to make for the year. Running to Good Will or Salvation Army after the holidays is not the most effective strategy if you’re hoping to reduce your tax obligation for this year.
Plan your giving ahead of time. Make it meaningful to you and what you care about. If you do that, you will probably gain much more intrinsic value than the monetary tax advantages of giving.
By addressing these four tax items now, you will set yourself up to be even more tax efficient come tax season next year.
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