Fall is the best time for last-minute tax planning because you still have a few months to meet end-of-the-year deadlines that can minimize your tax bill in the spring. Follow these five tips and you might even get some money back from Uncle Sam.
Bulk up your retirement contributions.
You can contribute up to $17,500 for your 401(k) in 2013. If you're age 50 or over, the limit is $23,000. If you're nowhere close to that amount, you can ramp up your contributions to take advantage of tax-advantaged individual retirement accounts. The same goes for Roth IRAs and traditional IRAs. If you want to max out your retirement savings, now is the time to start putting more money away. (You can contribute up to the 2013 limit until April 15, 2014.)
Check out one-time benefits that might apply.
Investments in certain energy-efficient products, water heaters, central air conditions, new windows and doors, and insulation could make you eligible for tax credits this year. A new water heater or air conditioner with an Energy Star label, for example, may result in a $300 credit, while window credits are available up to $200. If you install a solar energy system (or other type of renewable energy system), you could be eligible for a tax credit of up to 30 percent of the cost. Details about these types of tax credits are available at www.energysavers.gov.
Because tax experts say tax increases are likely in the future, they recommend saving big deductions until next year, if possible. So if you're planning to make a sizable charitable contribution, for example, you might want to hold off for the sake of your tax bill. Similarly, if you have flexibility over when you receive income, you might want to put as much in the bank before Dec. 31 so it counts as income in 2013 – before any potential tax increases.
Check that you've been paying enough taxes.
If you received income beyond your usual paycheck because of freelance work or income from a side business, then you might end up owing a lot of money in April. You're also at greater risk if you got married this year and earn a relatively high salary similar to your spouse. That's because of the so-called marriage penalty, which often means dual, high-earning couples owe more when they file taxes jointly than they did when they were single.
As a result of the Internal Revenue Services' recent announcement that it will now recognize same-sex marriages, even if couples live in a state that does not recognize their marriage, gay couples that include two high-earning spouses might also face the marriage tax. Likewise, they can start preparing for it by paying more to Uncle Sam throughout the year by lowering their tax deductions on their W-4 form. Other financial moves, such as buying a home, donating to charity or putting more money into retirement accounts can also help reduce your tax burden.
People who earn significant chunks of their salary in cash also need to make sure they're saving enough of that cash to pay the appropriate amount of taxes in the spring. The IRS keeps a close eye on people in professions that pay in cash, like waiters, by using formulas that estimate expected income. If you report less, you could be flagged for an audit – not something you want.
A big tax bill can not only shock your budget – you might owe the government additional fines, too. Check to see if you've been paying the correct amount of taxes by reviewing your payroll stubs or other documentation. If you're going to owe money, prepare by starting to save now.
Keep track of important receipts.
If you run your own business, are self-employed or spend money on education to boost your career, then many of your expenses may be tax deductible. Make sure you put your receipts in an easy-to-find filing system so you can claim them when you file your taxes next year. If your employer offers flexible spending accounts for health care costs, you also want to make sure to keep eligible receipts for doctor visits, pharmaceuticals and other health-related expenses. You often have until April 15 to file those claims.