For those of you who met the tax deadline and didn't file an extension, give yourself a pat on the back -- it's another tax season in the books. But, just because one tax season is out of the way doesn't mean you can't start thinking about how to make life easier for yourself when it comes time to doing your 2014 taxes.
Today, we're going to look at five things you can do right now to not only make your taxes easier, but potentially put more money in your pocket over the long run.
1. Stay organized
Consider this to be "practice what you preach" advice because it's my single greatest hurdle each and every tax season. Instead of spending hours searching through receipts, W-2s, 1099s, investment statements, and bank statements, consider entering all of this information on a monthly basis into an Excel file or money-management software platform so you can be organized come tax time. Keep in mind that your time is valuable, and having the right information at your fingertips will save you from a lot of hassle in the long run.
2. Narrow down your projected tax liability for 2014
If you're one of the many Americans that gets a four-digit refund from the IRS, or who winds up owing $1,000 or more to the IRS at the end of the year, you aren't doing yourselves any favors. Refunds are a nice way of forcing Americans to save their hard-earned money, but it's also not earning any interest or helping in any investable way while in the government's hands. Similarly, underpaying your taxes, if you make quarterly payments, by a significant amount can result in a penalty equal to 10% of the underpayment.
To correct this, you should take the time to plot out with some level of certainty what you expect to earn this year. This isn't to say you're going to hit your final tax liability on the nose, but it should allow you more of your own money upfront if you're due a refund, which you can put to work sooner, or reduce the surprise of an unwelcome underpayment penalty. This means being proactive on your W-4s and with your quarterly tax payments in 2014.
3. Max out your 401(k)
We have practically beaten down the door talking about individual retirement accounts around tax time at The Motley Fool, but that's primarily because Traditional IRAs and Roth IRAs allow you to make contributions for the prior year up until April 15. There's no previous year catch-up, though, on 401(k) contributions, meaning you should be thinking right now about how you plan to max-out your contribution in 2014.
One of the biggest retirement mistakes investors make is in not taking advantage of a company's 401(k) match. As I noted in November as an example, a 30-year employee of IBM making $40,000 a year, who plans to retire at age 65, and gets a match up to 6% by IBM (one of the most generous matches among big business), would be retiring with about $344,000 less in their account than if they took advantage of IBM's match. A 401(k) can play a big role in your retirement, and the contribution limit this year is $17,500, so get to it!
4. Open a Roth IRA
A Traditional IRA is a great upfront boost for taxpayers looking to reduce their taxable income, but it may not be the best solution for long-term investors. In fact, many investors should really consider opening or switching to a Roth IRA which will net you no upfront tax breaks but could deliver incredible tax breaks over your lifetime.
Although both IRAs are similar in that they penalize you for an early withdrawal before age 59 1/2, the big difference is that while you do owe taxes on the gains in your Traditional IRA once you begin taking distributions, the money in your Roth IRA can grow completely tax-free (in exchange for no upfront contribution deduction). You can see how this could be valuable to someone in their 20s, 30s, 40s, and even 50s who can use the power of compound returns to their advantage without ever worrying about paying a cent in taxes once they begin taking distributions at age 59 1/2.
5. Seek out deductions early
Lastly, don't wait until December before you decide you want to make a big impact on your deductions in 2014. There are a number of things you can consider doing year-round that could help reduce your tax liability including donating to your favorite charity and performing energy-efficient upgrades on your home. The point is that a number of people realize far too late in the game that they want to beef up their deductions, so be proactive in 2014 about how you're going to make your dollar go farther.