Many of us don't think much about taxes until April rolls around and we realize we only have a couple of weeks to submit our returns by the filing deadline. But the sooner you begin focusing on your taxes, the more savings you stand to reap. Here are a few tips you can start incorporating this year to lower your IRS burden and keep more of your hard-earned money for yourself.
1. Keep detailed records of all deductible expenses
If you typically itemize on your tax return rather than claim the standard deduction, you have many opportunities to write off legitimate expenses, whether it's medical costs, charitable donations, or business purchases. But you can't claim those deductions without the right documentation to back them up. Guessing at tax deductions is a good way to get your return audited. Rather than run that risk, implement a record-keeping system from the start.
One good bet is to create electronic files for your tax receipts and scan each one so you have a copy stored on your computer. If you can then back that up with some sort of online or cloud storage, even better. Physical receipts have a sneaky way of getting lost, and they can actually fade over time and become unreadable. Rather than run that risk, set up an electronic record-keeping system early on in the year.
2. Plan to max out your retirement plan contributions
The more money you put into a traditional IRA or 401(k) plan, the less income the IRS gets to tax you on. This year, IRA contributions max out at $6,000 for workers under 50 and $7,000 for those 50 and over. Meanwhile, 401(k)s max out at $19,500 for workers under 50 and $26,000 for those 50 and over. Funding a retirement plan is one of the easiest ways to legally shield earnings from the IRS, so even if you can't max out, aim to boost your savings rate as much as you can.
3. Make investment losses work to your advantage
Underperforming stocks in your portfolio can serve as a tax break. If you sell a stock at a loss, you can use it to offset capital gains in your portfolio, thereby avoiding taxes on them. If you have a net loss that exceeds your gains, you can use that remainder to offset up to $3,000 of ordinary income on a yearly basis.
That said, you don't want to go selling off stocks at random. Your goal should still be to minimize your losses so you're not taking too huge a hit, so if you intend to utilize this strategy, keep tabs on your portfolio and aim to sell when your losing stocks are trading at a higher price point. It doesn't matter when you take your investment loss during the year -- you get a tax break whether you unload a losing stock in January versus December. However, selling off a bum stock earlier in the year gives you an opportunity to reinvest your recouped cash sooner.
Focusing on taxes before the filing season officially begins is something you may not be inclined to do. But remember, it's never too early to get a handle on your taxes, and a little legwork at the start of the year could make the next 11 months a lot less stressful.