Finished your taxes? Take these steps to get ahead for next year
6 easy tax-time things to check on -- and they could mean more money for you
The annual tax deadline is next month, and right about now, some people are knee-deep in receipts, 1099 forms and W2s. When all that hard work is finished and your return is finally filed, the last thing you want to think about is your taxes.
Even so, it will be worth your while to do a little planning, even after your 1040 has been filed and accepted by the IRS.
Getting a jump start on next year’s taxes could reduce your future tax liability, boost your retirement savings and allow you to stress less when the next big tax deadline rolls around. Here are some smart steps you can take now to prepare for next year’s tax deadline.
Adjust your withholding
If you ended up with a huge refund, you might want to adjust your withholding, going forward. That big refund is not a gift from the government; it’s simply a return of money you paid.
Keep in mind that your big tax refund was actually a year-long interest-free loan to the government.
That cash could have been working far harder for you -- and adjusting your withholding will give you more money to spend and invest right now.
Adjusting your withholding is as easy as filling out a form. Just ask your employer for the paperwork you need, then fill it out and submit it as soon as possible.
Boost your 401(k) contribution
Tax filing season is the perfect time to revisit your 401(k) contribution, especially if you have not done so for a while. Every dollar you put into a deductible 401(k) plan is one fewer dollar you are taxed on, and raising the amount could reduce your liability for next year and beyond.
If you want to make your life even simpler, considering signing up for the auto-escalation program. Many employers let workers increase their 401(k) contributions automatically every year, and signing up is a great way to build wealth and lower tax liability.
See if you need to make quarterly payments
Hopefully, your current tax preparation resulted in a small refund or an equally small check to the IRS. If not, you may need to think about making quarterly payments next year.
If you owed more than $1,000 to the IRS, you may have been assessed penalties and interest in addition to the amount you underpaid. Making quarterly payments going forward will alleviate you of those penalties, so you can worry less in future years.
Invest your tax refund in an IRA
If you are in line for a big tax refund, why not make it work as hard as you do? Investing your refund in an IRA is a great way to save for the future, and it could be a good way to lower your tax bill going forward.
If you are eligible for a deductible IRA, putting the money in now will give it more time to grow and compound. If you prefer a Roth IRA, getting an early start means more opportunity for tax-free growth.
Start a tax fund savings account
If you scrambled to pay your tax bill this year, vow to do things differently next year. Putting a small amount from each paycheck into a high-interest savings account will help you build toward next year’s tax bill, so you won’t be blindsided when you complete your return.
If it turns out you don’t owe money next year, you can always redirect the cash to your favorite investment or add it to your IRA. Either way, you will be better prepared going forward, and that could make tax time less stressful.
Check the new contribution limits
From IRA accounts and 401(k) plans to health savings accounts and college saving programs, the IRS routinely adjusts contribution limits. Now that your current taxes are out of the way, you can check out those contribution limits and look for ways to max out what you save.
Even if you cannot afford to max out all of your accounts, knowing the limits will give you a worthy goal, one you can work toward all year long. If you already adjusted your 401(k) contribution, you will be that much closer to the new limit.
Tax time is a stressful time of year, and it’s easy to put it off. But whether you are a procrastinator or an early filer, planning for next tax season is a smart thing to do. So use the tips listed above to build a better tax life -- one with more money for you and less cash for the IRS.
Special to Graham Media Group, 2020