Here are some ideas that you can use throughout the year to make April
15th less taxing.
1. Be organized. Having your records in a usable manner
will make preparing your return easier and may help you with deductions you
might have forgotten about. Consider using a software program like Quicken or
Microsoft Money to keep you organized. You should also keep a file of
receipts and other records you know you will need.
2. Be sure to contribute to your 401(k) plan. By
deferring wages into your plan, you will keep your taxable income lower, save
money for retirement, enjoy the benefits of tax-deferred compounding of
earnings within the account and probably get some form of "match"
from your employer.
3. Use proper withholding and estimated payments. While
getting a large tax refund is nice, it usually is not too smart to let the
government hold your money until they refund your overpayment. There are
rules about how much you must have withheld or paid in estimates to avoid IRS
penalties. You may want to consult with your accountant to make sure you are
properly covered.
4. Consider giving appreciated stock to charities. If you
plan to make significant contributions to a charity and have some stocks you
are holding at a gain, you may want to consider giving the stock instead of
cash. You can get a charitable contribution for the fair market value of the
gift and not have to pay tax on the capital gain. There are some rules that
apply, so consult your advisor.
5. Contribute to your IRA early. The earlier you
contribute, the sooner the earnings become tax deferred.
6. Manage your itemized deductions. If your level of
itemized deductions is close to what is needed to use them, consider bunching
deductions every other year.
7. Use tax-advantaged borrowing. Not all interest you pay
is tax deductible. The interest paid on your mortgage and Home Equity Loans
gets treated better than interest paid on credit cards. Also, there may be
some tax deduction benefits to margin loan interest.
8. Be careful of mutual fund taxation. Even though mutual
funds pay no income taxes, you as a shareholder must report all distributions
you receive. Mutual funds must distribute dividends, interest and net capital
gains. If your fund has experienced much turnover within the portfolio, there
may be capital gain distributions regardless of whether the fund's value has
increased or fallen.
9. Consider tax-exempt bonds. The interest on bonds
issued by state and municipal entities is exempt from federal taxation.
10. Get help early if you have any complications. If you
have stock options, think you may be subject to the alternative minimum tax
or are expecting any unusual tax items, talk to your tax advisor early in the
year. Proper planning may help you avoid unpleasant surprises next tax
season.
