It's Never Too Soon to Make These 12 Tax Moves

It's Never Too Soon to Make These 12 Tax Moves
New year, new tax responsibilities
2018 just started, so it may seem too early to begin thinking about your taxes. To the contrary, I would encourage you to look at tax planning as a year-long process -- not just something you do for the last few weeks of the year and again in the middle of April.
With that in mind, here are 12 smart tax moves that you can make right now, including several that you can use throughout the year to minimize your tax bill and make filing your tax return as easy as possible.
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File your 2018 tax return
Well, technically you can make this move too soon. The IRS recently announced that 2018’s filing season will start on January 29, so it’s possible that filing season will not yet have started by the time you’re reading this.
Having said that, it’s a smart idea to file your tax return as soon after the start of filing season as possible. Not only will this allow you to get your tax refund as soon as possible, but it can also help prevent you from becoming a fraud victim. The IRS only accepts one return per taxpayer, so the sooner you file, the tougher it is for a criminal to file a false return in your name.
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Donate to charity
You may suspect that charities get the bulk of their donations toward the end of the year, and you’d be right. In fact, one-fifth of charitable donations are made within the last 48 hours of the year alone, and many more are made in the preceding weeks, especially around the Christmas holiday.
However, this also means that many charitable organizations see their cash flows dry up in the middle of the year. Instead of donating a lump sum of money to your favorite charities, consider splitting your donations into quarterly, or even monthly donations. This helps out your charities when they need it most, and also can ease the burden on you that comes with donating a large amount of money at one time.
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Harvest your tax losses
Tax-loss harvesting refers to the selling of losing investments in order to reduce your taxable income. This is generally considered to be a year-end strategy, but if you want to sell a losing stock now and put your money to work elsewhere, go for it. Even if you don’t end up with any capital gains for the year, you can use losses to reduce your taxable income by as much as $3,000, so this can be a lucrative move.
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Start saving medical expense receipts
The tax reform bill made cuts to several deductions, but one that was expanded by the legislation was the medical expense deduction.
Now, taxpayers can deduct qualified medical expenses that exceed 7.5% of adjusted gross income (AGI). If you earn $60,000 per year, this translates to a threshold of $4,500. This sounds like a lot, and it is, but there’s a long list of expenses that qualify, including dental care, vision care, prescription medications, and any health insurance premiums you pay yourself. This still won’t likely be a widely-used deduction, but the lower AGI threshold will certainly open it up to more Americans.
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Contribute to your IRA
You have a long time to make your IRA contributions. Contributions for 2018 can be made until the tax deadline in 2019, and you can still make your 2017 contributions until this year’s Tax Day.
However, if you’re one of the many Americans who waits until the deadline gets close to start stuffing money into their IRA, it could be smart to get started early. If you don’t have an IRA yet, consider opening one. If you open it before Tax Day, you can make contributions for 2017 and 2018 this year, and give your retirement savings plan a kickstart.
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Boost your 401k contributions
If you have an IRA at work, consider increasing your contributions to not only lower your taxable income, but put yourself on the road to financial freedom later on. The typical 401(k) saver contributes just enough to take full advantage of their employer’s matching program, but this may not be enough. Experts generally suggest that workers should aim to save 10% of their salary, not including any employer contributions.
ALSO READ: Want to Be a Millionaire? Increase Your 401(k) Contributions
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Adjust your withholdings
Did you get a big tax refund last year, or worse, did it turn out that you weren’t having enough money withheld and you owed the IRS money? If you’re an employee, the best-case scenario is for the IRS to take out what you’ll owe, but not a penny more.
Of course, it’s next to impossible to be so precise, but if you got thousands of dollars back or owed more than a few hundred dollars, it could be smart to visit your payroll department and adjust your withholdings.
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Organize your tax documentation
The chances of an IRS audit are very low overall. Fewer than 1% of individual tax returns get audited, and this percentage is significantly lower for people whose incomes aren’t unusually high or low, and for people who don’t have small business income.
Having said that, if you are audited, how organized your tax documentation is can make the difference between a smooth process and a nightmare. You don’t need to do anything too elaborate -- for example, I use an accordion folder to sort tax documents into categories (W2s, charitable receipts, mortgage documents, etc.) so that if I’m questioned, there will be minimal paperwork to track down.
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Learn about the new tax laws
You may have noticed that the recently-passed tax reform bill has been referenced several times so far, and for good reason. The legislation made a bunch of significant changes to individual federal income tax law, and these changes are too numerous to discuss them all here, so it’s a good idea to familiarize yourself with what’s changing for 2018 and beyond.
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Start a 529 plan for your kids
Even if your kids are very young, it’s never too early to try to prepare for the burden of college expenses. To be clear, 529 savings plan contributions are not tax-deductible on the federal level, although many states allow a state tax deduction for contributions.
Instead, 529 contributions are allowed to grow and compound tax-free, as long as the money is used for qualifying educational expenses. And, the tax reform bill just expanded the definition of qualified educational expenses to include elementary and secondary school (with limitations) in addition to college, so there’s even more flexibility when it comes to using these tax-advantaged accounts.
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Enroll in a dependent care FSA
If your employer offers it, you can contribute as much as $5,000 on a pre-tax basis to a flexible spending account which you can use to pay for child care, or care for other dependents you may have. While you can’t use this benefit and the child and dependent care tax credit for the same expenses, the FSA route usually is the better benefit.
One word of caution. If you and your spouse both have access to this type of account through your employers, the $5,000 contribution limit is per household, not per person. If you file using the “married filing separately” status, you can only contribute $2,500.
ALSO READ: Here's What You Need to Know About Flexible Spending Accounts in 2018
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Contribute to a health savings account, if you qualify
A health savings account, or HSA, is often confused with the flexible spending account (FSA), but it is a completely different type of account designed to help plan for healthcare costs.
To qualify, you need to be enrolled in a high-deductible health plan, which is defined by the IRS as a deductible of $1,350 (self) or $2,700 (family) for 2018. These pretax accounts allow qualified individuals to contribute as much as $3,450 for an individual or twice this amount if they have family coverage.
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