Tax planning is a very important step in maintaining your personal financial health. While tax planning can be done any time of the year, we prefer to do tax planning in the fall. Fall tax planning allows you to look back at the current year and fix any potential problems before year end and simultaneously look ahead to the coming year. Some strategies to improve your financial situation include:
Saving for retirement. Making even a small contribution to your retirement plan will not only reduce your taxable income, but will help your future financial position. If you are under 50, you can contribute up to $18,000 to your 401k and up to $24,000, if you are 50 or older. Another option is to contribute up to $5,500 (under age 50) and up to $6,500 (50 or older) to your traditional IRA. The deadline to make 401k contributions is December 31, 2017 and the deadline to make IRA contributions is April 17, 2018.
Donating to charity. Another popular method of reducing taxable income is to donate to your favorite charity. Before donating to reduce your taxable income, ensure you qualify to itemize deductions on your tax return. In order for a charitable donation to qualify, it must be made to a 501c3 status organization and have been made in the current tax year.
Adjusting withholding. This often overlooked adjustment can make a big difference to maintaining personal financial health and helping reach financial goals. If you haven’t been achieving target tax return results or you’ve had a significant change in income or deductions, simply changing withholding rates may be the answer to reach targets and prevent an unanticipated negative result.
Doing your research. Finally, an important piece of tax planning is familiarizing yourself with current tax law changes and reform. While some tax law changes may not affect you, it is important to know which ones will and how to best prepare yourself.
While this is not an exhaustive list, these are some of the most popular, effective tax planning strategies. As always, we recommend contacting your CPA to design a plan specific for your individual situation. A little time completing your tax planning now can save you time, money, and headache in the future.