Prepare Now for Next Year’s Tax Bill
By David Dierking
Every year around this time you’ll hear a lot of tax experts tell you about what you need to do before the end of the year in order to manage your projected tax bill. Liquidate your flexible spending accounts. Make charitable contributions. All of these recommendations are wise.
But this year’s isn’t the only tax bill you should be thinking about. The planning and choices you make now could have a significant impact on how much you can be sheltering from Uncle Sam next year. Some decisions should be part of a normal yearly financial assessment and some you will need to address in the next month or so before you miss the boat altogether.
Here are five questions that you should be focusing on right now for 2010.
1. How much should I be contributing to my flexible spending accounts?
Health care and dependent care flexible spending accounts are some of the best deals the government has going.
These plans allow you to set aside money to pay for qualifying expenses free from federal taxes. For someone who places the IRS limit of $5,000 per year into a dependent care flexible spending account, that could mean hundreds of dollars in tax savings. But be careful how much you commit. Any unused money left in the account at the end of year is forfeited.
Individuals are generally only able to sign up for the flexible spending account as part of their employer’s open enrollment period so if you don’t sign up for it now you’ll have to wait until next year.
2. Should I choose the regular or high deductible health plan at work?
This one requires you to do some forecasting of what your medical expenses will be. Unfortunately, that will always be more art than science.
People are enticed by the high deductible plan due to the lower monthly premium they’ll have to pay out of pocket. The drawback is that you’re on the hook for a higher deductible before insurance starts covering your expenses. One medical procedure or trip to the hospital and you could find yourself with some significant bills.
If you’re young, healthy, and don’t expect a need for health services in the next year, the high deductible plan may be a good way to keep a few extra dollars in your pocket.
This is another choice you’ll need to make before your employer’s open enrollment period ends.
3. How much can I contribute to my 401(k)?
In terms of retirement planning, the answer to the above question should always be “as much as possible”. The same answer also applies when it comes to tax planning.
Traditional 401(k)s have the added benefit of reducing your taxable income. The IRS sets an annual 401(k) contribution limit of $16,500 (and higher for those over 50) so someone in the 25% bracket could save over $4,000 on their taxes by maxing out their 401(k).
If the prospect of maxing out your 401(k) seems too much, try the incremental approach of raising your contribution by 1% every three months until you get there.
4. Do I have any losers among my investments?
In light of the recent recession, odds are you have some. When selling them, the losses can be used to offset any capital gains you’ve incurred during the year or some of your taxable income.
The sale needs to be made in the year you want to take the loss for tax purposes. Preparing a plan ahead of time can help put some of those losses right back in your pocket.
5. How much do I plan on donating to charities?
Making a donation to charity may be the easiest way to lower your tax burden.
If you itemize, the money you give will offset any taxable income you have. Donations could be in the form of cash, cars, stock or any of a number of other things that a charitable organization will accept.
Give a gift to charity and keep a gift for yourself in the form of a tax write-off. What better deal is there than that?
This article was originally written or modified on . If you enjoyed reading this post, please consider subscribing to my full RSS feed. Or you can also choose to have free daily updates delivered right to your inbox.