As 2014 passes the mid-point, it’s time to mid-summer tax review and make adjustments to ensure you’re minimizing your liability for the 2014 tax year. Here are some simple methods you should consider to increase your return and lighten up your tax burden.
Increase your retirement contributions. Anyone can contribute up to $17,500 to your 401(k) in 2014 ($23,000 for those 50 or older). If you’re contributing less than that amount, try to increase it to take maximize your savings and decrease your liability. If you use a Roth IRA or traditional IRA, consider meeting the maximum contribution of $5,500 ($6,500 for those 50 or older). If you want to fully utilize your retirement savings, you need to start contributing more money. Remember, you can contribute towards your 2014 IRA limits until April 15, 2015.
Pay the right amount of taxes. If you do freelance work or generate income from a side business, you could owe a lot of money come April. You should consider changing your tax status if you are recently married and your spouse also earns a handsome salary. The “marriage tax penalty” often negatively affects twin income couples. You may owe substantially more now that you’re married then you did when you were single.
The same is true if you get paid a significant amount of your salary in cash. Take a look at the tax rates and determine if you need to put more money aside to pay the required taxes next spring. The IRS closely monitors professions that get paid in cash, particularly service workers. The IRS has a formula which estimates what your tips should amount to, and if you report less, you might find yourself facing an audit.
Always verify that you’ve been paying sufficient taxes by reviewing your paychecks or invoices. You should start saving now if you even think you have underpaid.
Keep your receipts. If you are self-employed or have returned to school to enhance your career, many expenses are tax deductible. Make sure you save all your receipts in a safe and organized location so they are available when you file – or meet with your tax professional. If you are a recipient of a flexible spending account, keep all your eligible receipts for doctor visits, drugs and any other health-related expenditure.
The IRS medical expenses minimum out of pocket cost increased from 7.5 percent to 10 percent of adjusted gross income for those under age 65. You can only deduct expenses greater than the 7.5 percent minimum. Seniors (over age 65) are exempt from the increase until 2017. The IRS Questions and Answers: Changes to the Itemized Deduction for 2013 Medical Expenses page can be found here. Opt to utilize health savings or flexible spending accounts, paid via pretax premiums or tax deductible healthcare alternatives.
Put off deductions. You may be wise to put off any major deductions until next year as most tax experts expect a tax increase in the near future. If you are planning a substantial charitable contribution, you might want to hold off to better position yourself for your 2015 taxes. On the other hand, if you have sizeable income due you, you should strive to get it deposited before December 31 to assure you take advantage of the lower tax rate.
Top earners should consider ways to reduce taxable income and thereby avoid the highest tax bracket. The highest income tax bracket rate, for those earning over $406,750(for individuals) and $457,600 (for joint filers), is 39.6 percent. If your income is near that threshold, he says, look for ways to reduce it, such as by delaying income or taking any available deductions.
If you feel you achieved a passing grade in your mid-summer tax review, then enjoy the rest of your summer, knowing that you’ll also have some money to enjoy Spring Break 2015, rather than worry about your taxes. If you need help planning or preparing your taxes, contact us.