Tax Planning Strategies to Keep You Sane This April

If you’ve been reading my blog, you know that I’vve been writing about the Ten Simple Truths About Money.  These truths are meant to act as a framework to provide new ways for you to think about money that are easy to understand and implement.  Simple Truth #four is “Inflation and Taxes Are Money’s Enemies.”  This is a big topic so I broke it down into two parts. Today’s post will cover part two:  Taxes …. and Tips to Ease the Pain. To read part one, click here.

April Showers Bring May Flowers

“April is the cruelest month . . .” begins the first line of The Waste Land, the signature modernist poem by T.S. Eliot.

The poem had nothing to do with taxes. However, with the goal to raise awareness about National Poetry Month, the Academy of American Poets and the American Poetry & Literacy Project cleverly came up with the idea to distribute thousands of free copies of The Waste Land to selected post offices on tax day.  At least anxious taxpayers had something pleasant to read after they dropped their returns in the mail!

The first half of April can be very stressful and yes, cruel, if you aren’t organized or run out of funds to pay your tax. With the exception of an IRA contribution, there is nothing you can do to alter the outcome in April.  (Yes, you can file an extension, but you still have to pay the taxes due).

But taxes are money’s enemy on more than just tax day.  Taxes can erode the value of your investment portfolio and eat away at your income all during the year.  We all have to pay our fair share, but there are tips and strategies that can be implemented to help keep more of your money in your pocket and return thoughts of April to lovely Spring weather, longer days, strawberries and sweet English peas!

Tax Planning Strategies To Keep You Sane

Get Organized.
If you don’t do anything else, setting up a filing system for tax documents is a must. Not only will everything be in one place when you need it, but you are less likely to miss out on deductions when you are consciously filing receipts and documents all year. A series of folders with labels such as charitable contributions, property tax, business expenses is recommended. If you just dump everything into one file, you will have another major organizing task come April.

Tracking Expenses
Buy a notebook and keep it in your car. If you are doing charitable work, you can deduct miles to and fro. Keep good records of  the date, starting mileage, ending mileage, and the name and address of the charity. Keep track of business miles in the same manner. No more stressful guess work at tax time.  Also note the starting mileage on your odometer on January 1st and the ending mileage on December 31st. If you pay cash for parking meters while doing charitable works or business note those in your book too.

Know Your Cost Basis (purchase price of investments you buy)
Most brokerage companies track cost basis for you these days. But if you change brokerage company or advisor, it’s very wise to make sure you walk away with a document that lists cost basis for each investment. You need this data when you sell an investment. Maintain records of any improvements you do to your home as well. When you sell these costs will increase your basis (a good thing because it means you owe less tax).

Donating Items To Charity
Carefully itemize clothing, household goods, books, etc. that you give to your local Good Will, Salvation Army or other charity. Estimating a total dollar deduction is not enough. Do this before you drop the goods off, or you will forget what you gave away!

Calendar Important Dates
It’s so easy to forget to pay estimated taxes, especially if you are newly self-employed. When your taxes are not being deducted directly from your earnings you need to pay estimated taxes. The dates are April 15, June 15, September 15 and January 15. Set a calendar alert to yourself a week before so you have time to do the calculations. The best time to do tax planning is well before the calendar year is over: plan to do-it-yourself or meet with your tax advisor in October.

Tax Saving Tips

  • If you can hold on to a winning investment for more than one year, you will pay capital gains tax on the sale (currently at 15%) rather than your ordinary tax rate which can be significantly higher.
  • Buy income producing investments (i.e. bond funds or balanced funds) in retirement accounts rather than taxable accounts as the income from these investments is taxed at ordinary income tax rates not the lower capital gains rates.
  • Choose growth stock funds, individual stocks or tax-efficient mutual funds for your taxable accounts as they generate less or no current income.
  • If you have losses in your taxable account, you can sell them to offset gains in that account. Plus you can deduct $3000 in losses against your taxable income. You can buy back the investment if you want to as long as you follow the wash-sale rules.
  • Invest in a ROTH IRA if your income permits. You won’t get a tax deduction, but you won’t owe tax on withdrawal, ever.  (Special rules apply for earnings in Roth Accounts).
  • Save as much as you can in company retirement accounts. This money is tax-deferred and provides welcome tax relief in your highest earnings years. If you are self-employed take advantage of SEP IRA’s, Simple IRA’s or Defined Benefit plans. The type of plan you choose depends on your income and number of employees amongst other factors.
  • Consider converting some or all of your Individual IRA accounts to Roth IRA’s this year. For 2010, the income limitations are waived and you can spread the tax over two years if you choose.
  • State and Federal government’s occasionally provide tax credits. Unfortunately they all have different starting and expiration dates. Do a search on the IRS website www.irs.gov and your State’s tax board website to keep abreast of current credits. There are or have been credits for energy savings improvements to your home, childcare credits, first home buyer credits, education credits, etc.
  • Review your tax withholdings whenever your tax status changes. For example, when you get a pay raise (or pay cut), your buy a home, have a child, get married or get a divorce. The IRS has a tax withholding calculator or read IRS publication 919 or ask your tax advisor for help.
  • If you buy mutual funds at the end of the year in your taxable account, research the date of any planned capital gain or dividend distribution first. You don’t want to buy a fund and get immediate taxable income before you have a chance to benefit from any investment gain. Buy after the distribution date.
  • Tax-payers in high tax brackets can benefit from buying muni-bond funds or bonds in their taxable accounts.  These investments earn federally tax-free and sometimes state tax-free income.  (Not beneficial for lower tax bracket individuals).

This isn’t an exhaustive list, but it’s a good start for most people. I hope these tips and strategies will help to make tax time less stressful and keep more money in your wallet!

About the author

Cathy Curtis, CFP®

One Comment

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  • I’m 16 yrs. old and I filed my tax return and got accepted,both federal and state. It’s my mistake that i did it by myself without asking my dad how to do it.I accidentally answered “No” to the question “Can anyone claim you as a dependent”? It supposed to be “Yes” . My dad filed a tax return and claiming me as his dependent.He got rejected because what I did was a mistake. Do I need to file an amendment to fix my errors? Can my dad still claim me as dependent?Please help

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