With the craziness of the holiday season in full swing, the upcoming tax season might be the furthest thing from your mind. However, this is a great time to do some strategic tax planning before the year ends.
Here are three things that could give you a head start on your 2014 and 2015 tax planning.
Are you giving to any charities?
It always amazes me that so many of my friends and relatives donate to charity, and don't even take the tax break they are entitled to. Now, I completely agree with the sentiment that a tax write-off shouldn't be your primary motivation for donating. However, if you happen to give to charity anyway, you may as well reap the benefits. This goes for cash donations, as well as other items like food, clothing, and other household goods.
With the year coming to a close, now is a great time to decide whether or not you can spare some of your cash to make a donation to your favorite charitable organization. Just make sure you get a receipt when you do.
Max out your IRA contributions
It's absolutely true that you can make contributions to your IRA up to the April 2015 tax deadline that will be effective on your 2014 taxes. So, why should you worry about contributing now?
Basically, by finishing up your 2014 contributions now, you'll be free to spend 2015 worrying about 2015 -- not catching up from the year before. If you're still contributing to your IRA for this year when April rolls around, you'll have less than nine months before the end of the year to make your 2015 contributions. End the cycle, and get it done now.
For the 2014 tax year, you can contribute up to $5,500 -- $1,000 more if you're older than 50 -- and you might be able to get a tax deduction for traditional IRA contributions, depending on your income and whether or not your employer offers you a retirement plan at work.
Even if you can't afford to max out your contributions before the end of the year, you should still contribute as much as you can. The government is effectively paying you to invest for your future by giving you tax benefits in your IRA. Why not take advantage?
It matters when you pay for certain things, and when you get paid
If you are self-employed, it can be relatively easy to choose when you get paid for your services. By waiting a little longer than you normally would to send out invoices and collect receivables, you have some control with regards to how much income will be counted during the 2014 tax year, and how much you want to defer until 2015.
You can also control when you pay for certain expenses. An excellent example involves college tuition, which can get you one of two tax credits under the current law.
For example, the Lifetime Learning Credit is good for up to 20% of the first $10,000 of qualified education expenses. According to the IRS, you are to use the actual amounts you paid during the year when figuring the credit. This gives you a little freedom to decide when to pay certain expenses.
If you have tuition due for the upcoming spring semester, you can choose to pay the bill before the end of 2014 or after the New Year -- whichever is more advantageous to you. If you've already spent $10,000 in tuition this year, it makes sense to wait until next year. If you still have more credit available, you may want to go ahead and pay to maximize your credit for 2014.
Taxes are a year-round process, not just something you do in April
The most important takeaway here is that tax planning isn't just something you do for the first week or two of April. Instead, make it a year-round process.
Get in the habit of saving your receipts throughout the year. Consider contributing to an IRA every time you get paid, so it doesn't seem like a big deal. And start thinking about how you can take advantage of the tax benefits offered at the beginning of the tax year, not at the end.