For most people, taxes are something to worry about in the closing days of the year and in the week before April 15. Unfortunately, if you wait until the last minute to try to use some key tax-saving strategies, they don't necessarily work as well -- or they might not even be available at all.
If you want to cut your tax bill, or get a bigger refund, you can't afford to wait. Instead, get a head start on the tax returns that you'll file in early 2019 by considering the following three key areas.
1. Trying to offset large profits
A soaring stock market has helped balloon the size of most investors' portfolios, but it also can mean a lot of tax liability for those who have to sell their winning stocks. It's not uncommon to see massive capital gains from investors who trade frequently, especially among those who've decided that trimming back some of their biggest winners is a good way to manage the risk of a potential future correction or bear market.
In order to offset gains, strategies like selling losing positions can help you produce tax losses that can offset your gains on other investments. But if you wait until the end of the year, your hardest-hit stocks can often deteriorate even further, making the losses even more extreme and costing you money. It's better to take a smaller loss quickly than to suffer a bigger loss more slowly, and getting off to an early start in planning your taxes can make it a lot easier to identify losing investments and get rid of them before they can do further damage to your portfolio.
2. Preparing for marriage, divorce, or children
Your tax liability depends a lot on your filing status, which in turn is determined by whether you're married or single as of the end of the tax year, and whether you have qualifying dependents that can get you preferential status as a head of household. Even if the change happened earlier in the year, that's no guarantee that you promptly took action like changing your tax withholding to account properly for your new expected tax liability.
Looking at how things stand right now gives you enough time to fix any problems that might be waiting in the wings. For instance, with almost four months' worth of paychecks left in the year, you can adjust your withholding to ensure you don't have to pay any penalties for underpaying your anticipated tax during the year. Moreover, if you need help figuring out what a possible change in family status could mean, you can find professional advice early enough to benefit fully from it.
3. Getting your papers in order
If you want to make the most of the tax breaks that are available to you, it's important to collect the appropriate documentation. Whether it's getting a written acknowledgement from a charity after you make a donation, collecting tax identification numbers and other information from providers of child care services for which you expect to claim the child and dependent care tax credit, or any of a host of other favorable provisions, you'll typically have to have the right paperwork to prove to the IRS that you deserve the tax break.
If you keep documents now, then when you get formal tax forms early next year, you can compare the numbers and ensure that what's reported to the IRS is correct. If you don't, then there could be a problem if you never get the tax forms you expect -- and that problem could end up costing you more money in taxes.
It might seem early to do tax planning when school's just starting up. But by starting now, you'll be in a much better place to do everything you can to cut your tax bill when you file your return in early 2019.
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