Now that last year’s tax returns have been filed, it is time to review them more closely. This is an important exercise because it will help you see what you can do differently before next tax season.
Here are a few tips for 2014:
- Make sure you sufficiently fund your 401(k) plan, and be sure to take advantage of any matching contributions. Many employers match contributions, and you should take the free money!
Remember: both money you put into your 401(k) and any matching contributions are tax free until you withdraw funds when you retire. Also, remember there is a maximum amount you can contribute to your plan each year.
- Take advantage of a Flexible Spending Arrangement (FSA) or a Health Savings Account (HSA).
FSAs allow you to put pre-tax earnings into an account to pay either for qualified medical expenses or for the cost of childcare. The healthcare FSA has a contribution limit of $2,500 per year, and the FSA for childcare has a contribution limit of $5,000.
Note that if there is a balance remaining in your FSA at the end of the year, you lose that money.
HSAs work differently. They are only available when an employer offers a high deductible health plan, and they can be funded by either employer contributions, or employee contributions through a cafeteria plan. Both options are not included in your income. You can also contribute to the accounts directly, which would result in a tax deduction when you file your return.
Unlike FSAs, unused balances in HSAs can be carried over from one year to the next. If used to pay for qualified medical expenses, any earnings are tax free.
- Make smart investment choices.
The interest you earn on your bank account or on CDs is taxable to you at ordinary income rates, but the dividends you earn from stock or mutual fund investments that are qualified dividends are taxed as if they were capital gains.
- Try not to take money from a retirement account to meet a current need!
Taking money from a retirement account before age 59 ½ can be one of the most expensive income tax mistakes you can make. Taking money out of your retirement account before you are 59 ½ will cost you an additional 10 percent in penalties.
If you need cash, consider an alternative strategy like a home equity loan or a loan from your 401K.
- If you donate less than $250 to a charity, make sure you ask for a dated receipt. When the amount is more than $250, get an acknowledgement letter from the organization.
And if you volunteer your time, keep track of your costs, including mileage, and ask the charity to acknowledge your contribution in writing. This may result in additional deductions.
- Fix any withholding issues by filing a new W-4 with your employer.
The IRS expects that you will pay your taxes evenly throughout the year as you earn income. If you have income from other sources, such as stock sales or unemployment compensation, you may need to make estimated payments in addition to withholdings.
You can learn a lot by looking at the past, but don’t forget to look toward the future. Tax law changes happen every year. To take advantage of all of your deduction opportunities, be sure to educate yourself, or talk to your tax preparer.
Bruce Desrosiers is tax director with BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. Bruce has nearly 20 years of public accounting experience. He is also the author of “The Practice of Cost Segregation Analysis: Maximizing Tax Benefits for Building Acquisitions and Construction.” The firm, with nearly 400 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation, and financial staffing. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.