It's Time to Start Planning for Your 2014 Taxes
- Lower your 2014 tax burden.
- Strengthen your retirement.
- Increase your take-home pay today.
- Prevent an under-withholding penalty.
- Streamline the last-minute dash to get the paperwork in order.
You can achieve the first two goals by contributing to a tax-deductible retirement plan. If your employer offers you a traditional 401(k) or 403(b)-style retirement plan, every dollar you contribute to it up to the maximum allowed reduces your taxable income by the same amount. The money you contribute can grow tax-deferred until you retire. In other words, you save in taxes now; you likely save on taxes between now and retirement; and you strengthen your retirement overall, all with one simple step.
To reduce your 2014 taxable income, you need to contribute the money in 2014. Wait past the end of the year, and that 2014 tax deduction goes away.
Get Your Paycheck Right
The Internal Revenue Service says that the average refund on 2013 income taxes was $2,694. While that's a nice chunk of change, if you're getting that kind of refund and have a job that pays you every other week, it means that each one of your paychecks could have been about $100 higher. Why not collect it in your paycheck as you earn it rather than as a refund several months later?
%VIRTUAL-article-sponsoredlinks%Of course, there's a flip side, too. If you owed a significant amount when filing your 2013 taxes, you know the pain of coming up with a massive check to go along with all that April paperwork. And if the amount you underpaid in taxes during the year was significant enough, you can add the pain of paying a penalty. The IRS' "Safe Harbor" tests will help you figure out how much you are allowed to owe and help you avoid having to pay an underpayment penalty.
Ideally, you can project your income and taxes in a way that you'll owe nothing and get nothing back. In reality, you're unlikely to hit that level perfectly. Still, aiming to get close will provide you a great balance and keep you from scrambling next April or unnecessarily scrimping this year. As long as you pass at least one of those Safe Harbor tests, close enough is good enough.
To adjust your withholding (either up or down), use your employer's internal process to request the change. If your employer doesn't have another method, you can use form W-4.
Simplify Next April
Even if you're maxing out your tax-deferred retirement accounts and have your tax withholding practically perfect, you can benefit by starting to get your 2014 records in order now. If you haven't done so, start a folder to store all your tax paperwork. It's up to you to track any tax-related income or expenses that won't necessarily be reported in early 2015. If you've donated to charity, have unreimbursed employee business expenses, won a taxable contest, won at a casino or had any other event that may affect your taxes, you need to track of it. By keeping all your records in one place, you make it easier to complete your 2014 filing.
After all, do you really want another form to fill out if you have to file for an extension?
Chuck Saletta is a Motley Fool contributor.