Was this you last year? Granted you had until July in 2020 because…well you already know. But did you still procrastinate?
Regardless of when you actually file your return, we’ve long recommend preparing for tax season throughout the year to try and relieve some of the stress (see our post from over six years ago below 🔽).
Prep for Tax Time All Year Long
April 12, 2014
Here are some other tips to get you prepped for the dreaded tax season and to keep more money in your pocket. We’ve tried to arrange them in order for those Gen Zers filing for what may be the first time this year on up through the older, wiser generations.
- Reduce taxable income by saving for retirement through an employer-sponsored plan.
As soon as you’re eligible (it varies from job to job), start making contributions to your retirement plan through your employer. YES, we mean you Gen Z kid that just started your first job out of high school or college. Even though retirement seems a lifetime away, it’s not only cheaper to start doing it now (you can get away with stashing $100/month) but you also end up having less federal income tax taken out of your check because you’re saving for retirement. Oh and there’s another benefit…
- Get paid to save for retirement with the Saver’s Credit based on contributions up to $2000.
Yes, you read that right! The IRS will actually credit you up to $1000 ($2000 if married filing jointly) if you’re saving for retirement.
Here’s how it works: be 18 or older, not a dependent and not a student. Save up to $2000 for retirement through your employer or your IRA (that’s an Individual Retirement Account). After some adjustments to your income on the first couple of lines on your tax return you get your AGI (Adjusted Gross Income) which is what your actual tax bill is based on and determines how much credit you can get for saving. The max credit is 50% of what you saved, hence potentially up to $1000 if you saved $2000. You won’t see $1000 in the form of a refund but it will be subtracted from whatever your tax bill is based on your AGI.
- Take advantage of education credits.
Did you go back to school and eliminate yourself from being able to qualify for the Saver’s Credit we just mentioned? Don’t worry because there are education credits up to $2000 that you may be eligible for, namely, the American Opportunity Credit or the Lifetime Learning Credit. The qualifications are different for each credit but regardless make sure to keep track of your expenses like tuition, enrollment fees, course-related books, supplies and equipment as both are based on how much you spent on these items.
- Claim tax benefits for qualifying relatives.
Most people are aware that you can claim children on your taxes. But did you know that if you became the primary provider for a parent or grandchild with all of the turmoil of last year, you may qualify for additional tax benefits. It’s worth checking with your tax professional so start adding up those expenses now.
- Optimize your withholdings to meet your financial needs.
Feel like too much was taken out of your check throughout the year? Or maybe you had taxes due last year and you’d like to try to avoid that going forward? In either scenario you might want to take a look at your withholdings. The IRS not only provides a tool to estimate your withholdings, but it also walks you through the steps to change them with your employer.
- Reduce out of pocket childcare costs if your employer offers dependent care benefits.
If you have a tax deduction, oh um a child, and your employer offers you dependent care benefits, make sure you’re using them. This allows you to pay for daycare and extended day with pre-tax dollars. Back in the day when Ms. ME used a dependent care FSA (flexible spending account) for extended day the cost ranged from $50 to $150 a month depending on whether you needed care in the AM, PM or both. So if she needed both, the bill for the year was $1500 with about $58 being taken out of each paycheck before taxes. The pesky part was getting reimbursed from the dependent care account, but your employer could have a better system set up.
- Plan ahead for college expenses by saving with a 529 plan.
Have those tax dedu- children and concerned about paying for them to go to college? Start saving now. This isn’t a tax deduction for your current return but the earnings made in the plan are exempt from income tax as long as those little buggers go to college and the money is used for those expenses. In some cases you can even use up to $10,000 a year without being taxed to send them to a private K-12 school. The plans vary from state to state so it’s best to check and see what’s available where you live.
- Put your tax refund to work by paying off high interest debt, creating an emergency fund, or saving for retirement.
We see it year after year, a surge in used car sales and electronics purchases. But thankfully in an early 2020 survey, most U.S. adults were planning to save their tax refund. The trick is to not save it in a low interest rate savings account like Clark below is doing.
Schedule your free consultation to learn what higher interest rate options might be best for you.
The second highest response to what people planned to do with their tax refund was pay down debt. This is always a great choice and it seems to be one that a lot of people did last year. The third highest response was covering everyday expenses. Our advice here would be to make sure that those expenses are as low as they possibly can be. Make sure you’re not paying for unused subscriptions or overpaying for auto and home insurance.
We’ve got eight more tax tips coming up in part 2, so check back later today to read them! And as always tell us what you think in the comments or on social media…
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