Let's face it: It's June and your next tax return might be the furthest thing from your mind. While this is certainly understandable, it can be a smart idea to change your mind-set and start thinking of tax planning as a yearlong process -- not just something you do at the end of the year and during the first couple weeks of April. With that in mind, here are three moves you can make to get a head start on your 2017 taxes right now.
Give to your favorite charity while their cash flow is low
Did you know that 20% of all charitable donations are made within the last 48 hours of the year? And many more occur within the few weeks leading up to Dec. 31. While charities are undoubtedly grateful for your donations, whenever they may come, the point is that the cash flow and property donation stream of many charitable organizations dries up in the middle of the year.
So, I'd suggest giving more to charity consistently throughout the year for two reasons. As I already mentioned, this is a time of year when your favorite charity may not have a lot of cash flow. Additionally, instead of scrambling at the end of the year to get all of your donations in, making it a yearlong process can make it easier on your wallet. In other words, it can be much more practical to donate, say, $50 per month than $600 all at once in December.
Did you owe money in 2017? Here's what you might need to do
If you filed your 2016 tax return this year and ended up owing the IRS money, it could be a good idea to start preparing for next year.
If you owed more than $1,000 to the IRS and expect a similar result this year, you may be required to make quarterly estimated tax payments to the IRS. Specifically, you're required to pay estimated taxes if you expect to owe at least $1,000 and the amount you expect to have withheld from your paychecks is less than 90% of your total tax or less than 100% of your 2016 federal tax. In other words, if you estimate that you'll have total federal tax liability of $10,000 for 2017 and you anticipate less than $9,000 being withheld from your employer, you may need to pay estimated tax.
Generally speaking, this is common for self-employed individuals, or employees who have an additional revenue stream for which taxes are not withheld (such as if you do consulting work on the side).
Of course, if substantially all of your income comes from an employer and the problem is simply not enough tax being withheld from your paycheck, you may want to visit your payroll department and request that they increase your withholding.
The smartest tax move of all?
I've written before that tax-advantaged retirement saving is perhaps the best tax break available to Americans. Not only can you get a nice one-time tax break when saving in a 401(k), IRA, or similar account, but you'll also enjoy tax-free compounding for years, which can help you build a much bigger retirement nest egg.
As an example, let's say that you invest $5,000 in a traditional IRA every year, beginning when you're 30 years old until you retire at age 65. If you're in the 25% tax bracket, this translates to a $1,250 tax savings every year. (Note: With a Roth IRA, you'll get your one-time tax break when you withdraw the money.) So, you'll lower your tax bill by a total of $43,750 over the 35 years you're contributing to the IRA.
However, that's not the best part. Assuming a historically conservative 8% annual total return on your IRA investments, your contributions could grow into an $860,000 nest egg for your retirement. By increasing your retirement savings now, you get a tax break now and financial freedom later.
Therefore, I'd say that the single best tax move you could make right now would be to increase your retirement savings contributions, either by putting money into an IRA or increasing your contribution rate to your employer's retirement plan.
The Foolish bottom line
To be clear, none of these are moves you need to make right now in order to take advantage. You can make all of your charitable donations on New Year's Eve or wait until the 2018 tax deadline to get your retirement contributions in and it would have the same net effect on your tax bill. However, by making these tax-planning strategies a process all year long, as opposed to a scramble at the end of the year, you can spread out the financial burden and have less of an immediate impact on your wallet at the end of the tax year.
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