Developing a tax plan
Many Americans dread the April 15th federal and state income tax deadlines. Those who owe money at tax time frequently vow that they’ll be better prepared "next year." Treat income tax planning as a year-round effort and follow these helpful ideas:
- Get organized. Create a file for records you’ll need at tax time. Start by filing your pay stubs so you can keep a running total of your income and withholding. These figures will provide a rough idea of how much you expect to have earned and withheld by year’s end. Remember to include sources such as bonuses, stock sales and your spouse’s earnings when computing income. If you’re on track to earn more (or withhold less) than last year, it could mean that you’ll owe more money. You may have time to adjust your payroll withholding amount. On the other hand, a big refund means you’ve given the government an interest-free loan all year.
- Self-employed? Remember, the rules differ if you’re self-employed. Deadlines for opening a Simple IRA, SEP-IRA or Keogh plan may be different.
- Save those receipts. Get in the habit of saving and filing receipts for your purchases and charitable contributions to qualifying charities. (Don’t forget your non-cash donations of clothing and household goods.) Medical and dental costs, including prescriptions, may qualify for deduction as well. Keeping track of what you spend will help in setting up a household budget, even if expenses are not deductible.
- Be alert to changes. Will you be welcoming a new baby during the tax year? Do you or a family member expect to start college? Have you received an inheritance or other monetary windfall? Do you expect to buy a home, get a raise, start a new job, get married or divorced? These are just a few examples of life events where you should re-examine your income tax strategy.
- Pay attention to deductions.
- Using a home equity loan or home equity credit line instead of credit cards. Unlike the interest you pay on credit card debt, the interest you pay on your mortgage or home equity loan is probably deductible-and comes with a more attractive interest rate.
- Maximizing your retirement savings and pre-tax contributions at work. Do you qualify for an IRA? Does your employer offer a 401(k) or 403(b) retirement saving account? Consider having the maximum amount allowable deducted from your paycheck, especially if your employer offers "free money" in the form of matching funds. Your company might also offer other pre-tax benefits such as a Healthcare Spending Account (HSA).
- Meeting deduction thresholds. Medical expenses and some other types of expenses only qualify as deductions if they meet a specific percentage of your adjusted gross income. If you anticipate large medical bills this year, consider going ahead with other medical expenditures in the same tax year. Bundling these expenses could help you meet the government’s threshold for deductible expenses.
- See the "big picture." Every financial decision you make can potentially affect other aspects of your financial life. Taxes are no exception. Income tax planning should be done with regard for your general financial planning, insurance planning, employee benefits planning, investment planning, retirement planning and estate planning. Make income tax planning a year-round endeavor.
- Consider consulting a professional. A financial services professional may be able to identify tax savings that you overlook. Many financial planners are trained to see your tax strategy in the context of your overall financial abilities, needs and goals. Remember, the tax planning advice you receive could be deductible.
The Granite Wealth Management team works closely with the CPAs of our clients in order to ensure tax planning is done with your best interests in mind. Contact the Granite team to see how a comprehensive financial plan can help work toward your goals: Contact the Granite team.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.