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Tax season can be hectic, but being proactive with your finances can ease the stress. Taking steps to optimize your investments, savings, and tax strategy before the rush begins can lead to significant benefits. Here are ten smart financial moves to consider as you prepare for tax season.
Maximize Retirement Account Contributions
Contributing more to your retirement accounts, such as a 401(k) or an IRA, is a wise move. These contributions can reduce your taxable income and the money grows tax-free, helping secure your financial future. It’s a strategic way to save for retirement while also managing your current tax liabilities.
Review and Adjust Tax Withholdings
If you’ve had major life changes, like a new job or marriage, it’s important to adjust your tax withholdings. Accurate withholdings ensure that you’re not overpaying taxes throughout the year and avoid owing a large sum during tax season. This adjustment helps maintain a balanced cash flow throughout the year.
Organize Financial Documents
Start gathering and organizing all necessary financial documents early. This includes W-2s, 1099s, mortgage interest statements, and records of charitable contributions. Having everything in order simplifies the filing process and helps you avoid missing valuable deductions or credits.
Consider Charitable Donations
Making charitable donations can be a beneficial tax strategy. Donations to qualified charities can be deductible, reducing your taxable income. Ensure you keep receipts and records of all donations to claim them during tax filing.
Explore Health Savings Account Contributions
Contributing to a Health Savings Account (HSA) can offer triple tax benefits: contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are not taxed. Maximizing your HSA contributions can be a smart way to save for future health expenses while reducing your current taxable income.
Assess Investment Portfolio for Tax Efficiency
Review your investment portfolio for opportunities to optimize for tax efficiency. This might involve selling underperforming investments to realize losses that can offset gains (tax-loss harvesting) or rebalancing to ensure your portfolio aligns with your long-term goals and tax strategy. A tax-efficient portfolio can minimize the taxes you pay on investments over time.
Plan for Any Tax Payments
If you anticipate owing taxes, start planning for that payment now. Setting aside funds gradually can ease the financial burden when taxes are due. Knowing the amount you might owe ahead of time prevents surprises and financial strain.
Consider a Roth Conversion
Converting a traditional IRA to a Roth IRA can be advantageous, especially if you expect to be in a higher tax bracket in the future. While the conversion triggers a taxable event now, it allows for tax-free growth and withdrawals later. Assess your current and future tax situation to determine if this move is beneficial for you.
Review Eligibility for Tax Credits and Deductions
Familiarize yourself with various tax credits and deductions for which you may be eligible. This can include education credits, energy-saving home improvements, or child tax credits. Understanding what credits and deductions you can claim can significantly reduce your tax bill.
Seek Professional Tax Advice
If your financial situation is complex, consider consulting with a tax professional. They can offer personalized advice tailored to your unique circumstances, ensuring you take advantage of all available tax-saving strategies. Professional guidance can be invaluable in navigating the complexities of tax laws and regulations.
Michelle Harler is the founder of Guide2Free, a website dedicated to finding and sharing freebies, product testing opportunities, and other ways to save money. With over a decade of experience in the industry, her expertise in finding quality offers makes Guide2Free an invaluable resource for anyone looking to try new products and save money.