With April 15 not too far behind us, and your 2014 tax returns so far away, it's easy to lose track of things and get a little sloppy in your tax planning.
However, maximizing your tax benefits should be a year-long effort, especially if you want the biggest refund or lowest tax liability possible. With that in mind, here are a few things you should take time to catch up on.
1. Check how much your employer is withholding
Did you get a big tax refund this year? While this may seem counterintuitive, that's actually not such a good thing. When you get a tax refund, it's as if you gave the government an interest-free loan for a year.
If you receive a large refund, it could mean your employer is withholding too much of your paychecks. Now is a great time to double-check your withholding status and see whether you may be entitled to extra exemptions more exemptions than your employer currently claims on your behalf. Take a look at the exemptions worksheet from the IRS to learn more.
Think about it this way: Would you rather have an extra $200 every month to help with your expenses and increase your savings, or would you rather have $2,400 in a lump sum next year?
2. Make sure you're saving the right receipts
Summer is a good time to catch up on your receipts. When you have a few hours to spare, sort through your receipts to make sure you have documentation for all of the deductible purchases and donations you have made so far this year.
And especially don't forget about summer-specific expenses that can lower your tax liability. For example, do you send your kids to summer camp while you work? Depending on your income, the IRS may allow for a credit (better than a deduction) of up to 35% of day camp expenses under the "child and dependent care" category.
3. Get organized
Speaking of receipts and other documentation, summer is a great time to get your tax-planning setup organized. Your system doesn't have to be too complicated.
For instance, I use an accordion file to sort receipts and an Excel spreadsheet to keep track of deductions. Another helpful practice is to print your credit card and bank statements each month and highlight the purchases that qualify as deductions. Make a note of what it is, e.g., "charitable donation" or "business expense." Trust me: It's a lot easier to make notes every few months than it is to remember everything at the end of the year.
4. Spread out your charitable giving
Many people do most of their charitable giving at the end of the year, but it might be easier on your wallet to spread out your donations.
Because charities tend to get the bulk of their money in the winter months, many are hurting for cash during the summer. So, if you were planning to give say, $1,000 to your favorite charities before next tax season, why not give half now? It'll lessen the sting of parting with the entire amount at once, and you'll be giving at a time when the money is really needed.
5. Do some retirement planning
Now that we're past the halfway point of 2014, it's a good time to take stock of your retirement contributions. For the 2014 tax year, you can contribute up to $5,500 (or $6,500 if you're over 50) into an IRA, and you may be eligible for a tax deduction, depending on your marital status, income, and whether or not you're covered by an employer's retirement plan like a 401(k).
If you're behind, don't worry: You have plenty of time to catch up. After all, that's why you're doing this summer tax checkup.
The IRS allows contributions for the 2014 tax year until the April 15 tax deadline. So, even though it's August, you have more than eight months left to contribute -- not just the five months left in the calendar year. So, however much you have left to contribute, consider dividing that number by eight and setting aside that amount every month between now and April.
6. Cut some investment losses
Is some of your portfolio in the red now that the market has declined a bit? The major indexes are still up for the year, so chances are you're sitting on some gains, but now may be a good time to unload some of your losers if you have any.
Why? Investment losses can reduce your income by offsetting gains. Short-term losses offset short-term gains (which are taxed at a higher rate), and long-term losses can offset long-term gains.
If your losses are greater than your gains in a particular year, you can deduct those losses up to $3,000 from your total income for the year. And if your losses are even greater than this amount, you can carry over the remainder to the next tax year.
It'll make your life easier later
With a little extra effort now and throughout the year, you'll be able to make tax season a lot easier on yourself next year, and you might even find some extra deductions in the process.