This year's tax season may be long over, but smart tax planning is a year-round activity: The financially savvy are already thinking about ways to reduce next spring's payout to Uncle Sam.
Given that, we asked some of our Foolish contributors to share money-saving tax tips that you can put to work right now.
Increase your retirement account contributions
Brian Feroldi: A simple but effective way to minimize your future tax bill is to max out your contributions to tax-deferred retirement accounts like the 401(k) or Traditional IRA. You fund these with your pre-tax earnings, so any money that is put in this year will lower your total taxable income and lighten next spring's tax bill.
The contribution limits for each of these accounts vary, but if you can afford it, I'd suggest pushing yourself to try and hit those maximums.
The most that you can put into a 401(k) account this year is $18,000, or $24,000 if you are age 50 or older. (The limits rise over time to compensate for inflation.) If yours is one of the many employers that offers a company match for some portion of what you contribute, make sure you are putting in enough to score the full match -- even if you can't hit the government ceiling.
The annual contribution limit to a Traditional IRA is $5,500, or $6,500 if you're 50 or older, and in many cases funding the account will also help lighten your tax bill. But unlike the 401(k), for the IRA, income limits apply. The IRS has created a simple table to help you figure out if your contributions will qualify for a tax break; look it over or talk to your financial advisor about the tax implications before using this investment vehicle.
Maxing out your contributions to tax-advantaged accounts will go a long way toward easing your tax burden, as well as improving the odds that you have a comfortable retirement, but I recognize that level of savings is more than millions of taxpayers can afford. My suggestion for anyone who wants to eventually reach those maximums in the future is to simply start routing 100% of any raises or bonuses you receive directly into these retirement accounts. Doing so will allow you to contribute ever-higher amounts over time without your take-home pay taking a dip.
Give money away
Selena Maranjian: One great way to shrink your tax bill is to make tax-deductible donations to charity. (Note: You have to itemize your deductions in order to use this strategy.)
There are rules to follow, of course. For example, the donations must be made to qualifying organizations. You can't deduct money given directly to homeless people, for example -- but many nonprofits working to help the homeless will qualify. Donations to political candidates also don't qualify. You'll need to be able to support your claimed deductions with evidence such as receipts or cancelled checks. For donations valued at $250 or more, a timely receipt from the receiving organization is required. Note, too, that if your donation benefited you in some way -- such as if you donated $100 and received tickets to an event worth $60 -- you must deduct the value of what benefited you. In that ticket example, you could deduct $40.
Donations don't have to be monetary: You can also donate goods such as clothing and household items to charities, as long as they're in good and usable condition. You'll still need to have a receipt for your donation, and you'll need to estimate the fair market value of each item instead of, say, deducting how much it originally cost you.
There are other rules, too. For example, the total value of your contributions isn't allowed to exceed 30% or 50% of your adjusted gross income -- but that one isn't likely to apply to most of us. Learn more and consider making donations to charity part of your tax-reduction plan.
Adjust your tax withholding status
Sean Williams: Typically, the fourth quarter is when taxpayers look to make last-minute moves that could benefit their current-year tax situation. However, there's one move that all taxpayers should consider making right now that could be quite beneficial: Estimate your current-year tax liability based on your income to determine if a change to your tax withholding is in order.
In a typical year, about 80% of all tax filers will get refunds from the federal government. While receiving a fat check from Uncle Sam might seem like good idea, especially if you have trouble saving money or resisting the urge to spend when there's extra cash in your checking account, getting a refund from the IRS simply means that you weren't smart with your money throughout the year. A tax refund means you allowed the government to hang onto your money for months without paying you a cent in interest -- time during which you were denied the opportunity to invest it or or use it to pay down debt.
What should you do? Take a good look at how much you've earned through August, and estimate what you believe you'll make for the remainder of the year based on your earnings history over the first eight months. Once you have your annual estimate, use a tax calculator to figure out what your estimated tax liability should be. Ideally, when you prepare your taxes, you want to wind up with a refund that's as close to $0 as possible.
If you're slated to receive a big refund, consider adjusting your W-4 tax withholding form so that little to nothing gets withheld from your paychecks for the remaining months of 2016. Instead of getting one lump-sum refund next spring, you'll get a nice boost every payday for the rest of the year, which will allow you to whittle down debts or invest for your future, or perhaps just give you a few extra dollars in your pocket for the upcoming holiday season.
Brian Feroldi has no position in any stocks mentioned. Like this article? Follow him on Twitter where he goes by the handle @Longtermmindset or connect with him on LinkedIn to see more articles like this.
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