It’s just a few days past the April 15 tax filing deadline. Yet it’s also the perfect time to begin thinking about next year’s taxes.
Think about the big picture. What has changed or will change this year related to your financial life? Will you be getting married, welcome a new baby or have a child move out of your household? These changes in family status may trigger the need for an adjustment in your withholding tax based on a change in the number of applicable exemptions.
Update your retirement savings goals. Have you received a pay increase this year? Do you know whether you are on track to contribute the maximum amounts permitted by the IRS? Adjustments may be needed for your employer-sponsored retirement accounts. Are you also eligible to make ROTH contributions? Do you have self-employment income that might qualify you for additional or larger retirement contributions? Might you use at least a portion of any pay increase you’ve received this year as an additional contribution?
Use FSA/HSA accounts. Take advantage of the ability to contribute to a flexible spending account for medical expenses or dependent care expenses if available through your employer. The maximum contribution per eligible taxpayer for FSA accounts currently is $2500 annually. Separately, you can also contribute a maximum of $3300 per individual plan or $6550 for a family plan to a health savings account in 2014 to use in paying for eligible medical expenses. However contributions to a HSA account must be paired with a health insurance policy which meets certain minimum requirements, including minimum high deductible levels applicable per individual and per family. Contributions made to FSA and HSA accounts reduce taxable income dollar for dollar. Plus earnings grow on a tax deferred basis and withdrawals can be made on a tax free basis as long as those withdrawals are used to pay for eligible expenses.
These accounts become even more attractive in those situations where an individual can contribute to both. Be mindful, though, of the various restrictions that apply to each type of plan. In general, contributions to FSA accounts must be used within the calendar year or else benefits are forfeited, unless the employer’s plan document allows for non-forfeiture if not used within a prescribed time period. However there’s no similar ‘use or lose’ requirement for contributions made to a HSA. Contributions made to these plans may accumulate over multiple years if there’s no current need to pay for a medical expense.
Consider your investments. Don’t overlook the role your investments have toward your tax liability. Taking action as simple as holding tax efficient investments in a taxable account and less tax efficient investments in a tax deferred account is an easy first step toward meeting that goal. Tax efficient investments are generally those which offer the potential for/distribute qualified dividends and long term capital gains and those which have little turnover.
Also consider the length of your holding period before you sell individual investments which have appreciated in value if held in a taxable account; strive to hold these investments long enough to qualify for a long term capital gain by owning that investment for at least one year plus one day.
Organize. Lastly, don’t overlook the importance of organizing your finances. Keep better records so you can identify and document all eligible expenses. Collect all tax-related documents in a central location, such as an envelope or folder, throughout the year so they will be readily available. Last minute searching for needed documents is not enjoyable — and neither is the related stress associated with it.
Resolve to make tax planning and preparation a much smoother process for 2014. It will be if you begin now.