Filed under: Personal Finance, Retirement Plans, IRS, State Income Tax, Financial Education
We're halfway through the year, which makes it the perfect time to take a close look at your potential tax liability for 2014. You still have time to make adjustments to ensure you're minimizing the amount you owed. These four strategies might even make it easier for you to get money back from Uncle Sam once you file your taxes.
Bulk up your retirement contributions. You can contribute up to $17,500 to your 401(k) in 2014; for those 50 or older, the limit is $23,000. If you're nowhere close to that amount, consider ramping up your contributions to take advantage of tax-advantaged accounts. The same goes for Roth IRAs and traditional IRAs, where the maximum contribution amount is $5,500 (or $6,500 for those age 50 or older). 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 2014 limit until April 15, 2015.)
Delay deductions. Because tax increases are likely at some point in the future, tax experts recommend saving any 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're flexible about when you receive income, you might want to get as much in the bank before December 31 so it counts as income in 2014, before any potential tax increases.
David McKelvey, a tax and business consulting partner at Friedman LLP, says top earners should also consider ways to reduce their taxable income so they can 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.
Check you've been paying enough taxes. If you received income beyond your usual paycheck because of freelance work or income from a side business, 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 similar, relatively high salary to your spouse. That's because of the so-called marriage tax penalty, which often means dual, high-earning couples owe more when they file taxes jointly than they did when they were single.
People who earn significant chunks of their salary in cash also need to make sure they're putting enough aside to pay the appropriate amount of taxes in the spring. The Internal Revenue Service 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, which is not something you want.
A big tax bill cannot only shock your budget, but you might owe the government additional fines, too. Check to see if you've been paying roughly the correct amount of taxes by reviewing your payroll stubs or other documentation. If you think 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 have been spending money on educational costs 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, be sure to keep eligible receipts for doctor visits, pharmaceuticals and other health-related costs. You often have until April 15 to file those claims.
McKelvey says since the threshold for deducting medical expenses went up from 7.5 percent of adjusted gross income to 10 percent for those under age 65, you can only deduce expenses that are greater than those minimums. (Those over age 65 are exempt from the increase until 2017.) For expenses under those thresholds, taxpayers can rely on health savings or flexible spending accounts, where contributions are pretax or tax deductible. (Just be sure to follow all relevant rules and limits, which are often available through your human resources department or account provider.)
Talking taxes might not be as fun as planning your summer vacation, but it can pay off just in time for next year's spring break.
Kimberly Palmer is a senior editor for U.S. News Money. She is the author of the new book, "The Economy of You." You can follow her on Twitter @alphaconsumer, circle her on Google Plus or email her at kpalmer@usnews.com.
