With tax day more than six months away, taxes may be the last thing on your mind. However, the end of the year will be here soon, so now is a good time to get organized and look for opportunities to reduce taxes.
- Create a tax documents and receipts folder. File receipts as expenses are incurred. If you can deduct medical, business or charitable mileage, be sure to keep good mileage records. Many deductions are missed due to poor record keeping.
- Review your earnings statement to make sure your level of withholding is appropriate for your household income. If you are self-employed, make sure you are making adequate estimated tax payments that include self-employment tax. This is where many new business owners get an unpleasant surprise April 15.
- Take advantage of opportunities to defer taxes. Where possible, maximize your deductible contribution to your company retirement plan. At the very least, contribute up to the employer match. If you are self-employed, contribute to a SEP (Simplified Employee Pension) or Simple IRA (Simple Incentive Match Plan for Employees) to defer income until retirement. If you are eligible, consider contributing to a Roth IRA. This will not provide a current tax break but will help keep taxes lower in retirement. Additionally, if you have high deductible health insurance, you can defer taxes by fully funding your Health Savings Plan.
- If you are saving for college, make a contribution to a 529. Your contribution is deductible on your Colorado return in the year the contribution is made and will grow tax free if it's ultimately used for college expenses.
- Another opportunity for a significant tax deduction is donating unneeded stuff to charity. When you make a donation, get a receipt and thoroughly document the items you have donated. The IRS allows you to deduct the fair market value of your donated items. Goodwill and the Salvation Army have "Value Guides" available on the Internet to help you value your donation.
- If you make cash donations to nonprofit organizations, consider making a donation of appreciated stock rather than cash. The charity will receive the full benefit of your gift and you can avoid paying capital gains. In 2013, you also can donate up to $100,000 of your required minimum distribution to a charity and avoid paying taxes on the distribution.
- Finally, establish a tax-efficient portfolio. Invest in actively managed high-turnover mutual funds, REITS and other investments that pay high dividends and yields, such as high-yield bonds in your 401k or IRA. Invest tax-efficient index funds and municipal bonds in your taxable accounts. Invest your most risky assets from which you expect the greatest appreciation over time in a Roth IRA. Good candidates for a Roth IRA are small and mid-cap stock funds.
Jane Young is a certified financial planner and an enrolled agent with the Internal Revenue Service. She can be reached at Gazette@itsnotjustmoney.com.