Get a Head Start on Next Year's Taxes
Now that you've finished filing your 2008 tax return, it's the perfect time to think about what you can do now to make next year's process easier and what steps you can take to shrink your tax bill.
1. Plan to maximize deductions. Before you put that tax file away, go through the forms and look for frequently overlooked deductions to keep in mind for next year -- such as the child-care tax credit (even summer day camp counts if your child is younger than 13 and you and your spouse work) and out-of-pocket charitable contributions (such as 14 cents a mile to do charitable work or the cost of ingredients for a casserole you make for a nonprofit's soup kitchen).
See our 11 Most Overlooked Tax Deductions for more ideas. If you have any self-employed income, also review the IRS's Tax Guide for Small Businesses (especially the section about expenses) for ideas about business write-offs for the coming year. Also see Tax Law Changes Beyond 2008 for new rules that can help you, and visit our Kiplinger's Tax Center for more tax-saving ideas.
2. Clean up your files. Keep your tax returns forever. But you can shred most of the supporting documents -- such as canceled checks and receipts -- after three years (you can generally be audited only for up to three years after the tax-filing deadline). Keep the paperwork for at least six years if you're self-employed.
There are a few exceptions: Keep records of stock purchase prices and dates as long as you own the shares; retain Form 8606 recording nondeductible IRA contributions until you take IRA withdrawals; and hold on to home-improvement records as long as you own the house (which could reduce the capital-gains taxes you owe when you sell).
For more information about what to keep and toss, see Which Tax Records to Keep.
3. Consolidate accounts. Did a slew of t brokerage and mutual fund statements drive you crazy at tax time this year? Consider consolidating your accounts with one brokerage firm before tax time next year, which could also result in lower fees. The new firm should be able to provide the paperwork and make the transfer process easy.
See our Which Online Broker is Best for You? tool for ideas.
4. Don't wait to make your IRA contribution. Too many people wait until the last minute -- April 15 -- to make their IRA contributions, then have a tough time coming up with enough cash to contribute the maximum amount. Instead of waiting until the deadline of April 15, 2010, consider making your 2009 IRA contribution now. If you're getting a tax refund, contribute some or all of that cash to your account. Or you can sign up to have money transferred automatically from your bank account to your IRA every month, which makes it so much more manageable to contribute the money (if you start in January, transferring $416 per month gets you to the maximum $5,000 for the year; people 50 and older can contribute an extra $1,000).
If you qualify for a Roth IRA, you can withdraw your contributions at any time without taxes or penalties, and you can take out the money tax-free after age 59½. For more information, see Why You Need a Roth IRA.
If you have any self-employed income, consider making contributions to a Simplified Employee Pension (SEP) or solo 401(k) throughout the year, too. For details on these options, see Do-It-Yourself Retirement Plans.
5. Adjust your withholding. If you got a big refund this year, you may feel pretty good right now. But it means that you actually gave the government an interest-free loan for the year. Wouldn't you rather have more money in each paycheck instead of having to wait another year to get the cash?
It's easy to boost your paycheck by adjusting your withholding. Just fill out a new W-4 form and submit it to your employer, and you'll start to see the extra money right away. To find out how many allowances to claim, use our withholding calculator, which was recently updated to include the withholding changes because of the stimulus. Also see Get Next Year's Refund Now for more information.
And if you did get a refund this year, use that money to improve your long-term financial situation. See 5 Smart Uses for Your Tax Refund for ideas.
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