With tax season is coming to a close, filing your next tax return in 2015 may be the furthest thing from your mind. However, now is the best time to learn from the past and position yourself to maximize your deductions and minimize your liabilities for the rest of this tax year. Here are three things you need to do right now to get yourself on the right path for the future.
Keep better records
Are you one of those people who simply claim the standard deduction each year? According to the IRS, about 63% of people used the standard deduction, although studies have shown many people would do better by taking the time to itemize. Maybe 2014 is a good time for you to try it and see if it helps!
In order to really take advantage of itemizing, you need to keep very accurate records. Save your receipts and other documents showing tax-deductible expenses. Did you buy your own work uniforms or other job-related items? Save your receipts! Do you give to charity regularly? Save the documentation, even if it's just a few dollars at a time. You'll be surprised at how much your tax-deductible expenses can add up at the end of the year.
Also, make sure you do your homework and figure out all of the potential deductions you qualify for. Many people don't realize that things like moving expenses, tax preparation fees, sales taxes, and child care expenses are all deductible. This may sound like a lot of work, but if you wind up getting back a few thousand dollars more than you would have, it will have been time well spent!
Saving for retirement can go a long way
Even if you have a retirement plan at work, contributing to an IRA can be one of the best lifelong tax benefits. Essentially, you set aside some of your money for your retirement (up to $5,500 per year), and your money is allowed to grow tax-free until you reach retirement age. Additionally, if you open certain types of accounts, and earn less than the maximum income limit, you can deduct your contributions on this year's taxes.
There are two basic types of IRAs, the Traditional IRA and the Roth. The main difference is that with a Roth IRA, you pay tax on the money now, but all qualifying withdrawals are tax-free once you retire. The traditional accounts are the opposite. You can deduct your contributions now (again, if you qualify), but your withdrawals will be taxed once you retire. Both types of accounts are subject to income limitations in order to take full advantage, and you can read more about both types here.
You don't want a refund, and here's why
Did you get a refund this year? It may seem nice to get a big check at the end of the year, but it may not be such a good thing. As most of us know, the basic reason for receiving a refund is because the government withheld more money than they needed to during the year. What most people don't realize is how they're essentially giving the government an interest-free loan when they could be putting that money to work for themselves.
Ideally, you want the IRS to take out exactly enough money to cover your tax liabilities, and not a penny more. Unfortunately, there is no perfect formula for this. The best way to make your withholding as close as possible to where it needs to be is to visit your HR office and make sure you're claiming all of the exemptions to which you're entitled. Here is the worksheet employers use.
Taxes are tricky, but are worth doing right
It is certainly a lot more work to maximize your tax advantages, but the extra work can certainly be worth it and it will seem like less of a burden over time. Once you get in the habit of saving receipts, it will become routine. The same goes for setting money aside for retirement. Besides, it's a small time commitment that can pay off tremendously over the long run!
Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.