The books are closed on another year, but that doesn't mean that you can't start planning your taxes better for the year to come. In fact, you might be better off if you look ahead to possible credits and deductions for the year ahead. If you were scrambling to squeeze in one more deduction at the end of last year, make it a point to figure out how to improve your situation right now. Looking ahead can make the entire process easier next year, and you are less likely to miss out on deductions and credits to which you are entitled.
Where Will You Spend Your Money?
Your first step is to look ahead and see where you are likely to spend your money. What are your necessary expenses? Figure out how much you need to spend, and then determine whether or not you will be able to deduct those expenses.
If you want to give more to charity, figure out a smoother way to go about it, putting aside money each month for the purpose, rather than rushing in at the end of the year to make it happen. You'll provide better for the cause of your choice, and your cash flow will improve. Plus, you can get a bigger tax deduction. This process applies to your mortgage payments, child care costs, retirement account contributions, student loans, and your business expenses.
Look ahead and do your best to plan your year. Then keep track of which spending is likely to be tax deductible or result in a credit. Determining that ahead of time can save you trouble later -- and ensure that you don't forget something come tax time.
What About Your Income?
You can also keep in mind your income in your tax planning for the coming year. Here are some things to consider now, before tax filing season rolls around next year:
- Tax withholding: The first thing that many financial gurus suggest you do is review your tax withholding. Are you withholding too much? Too little? Look at where you can improve your withholding to better fit your goals. Do you want to give the government an interest-free loan? Or are you more concerned with using your tax withholding as a forced savings to ensure that you have money for something specific later? Do what works for you, and adjust your withholding to help you reach your goals.
- Quarterly taxes: If you have side income, you might need to pay quarterly taxes. Plan for this now so that you aren't caught by surprise later. Set money aside each month so that you have what you need when quarterly taxes are due.
- Investment planning: Remember that your investment gains can impact your income tax. Make sure that you understand the difference between long-term and short-term gains, and how they are taxed. Long-term gains come with a favorable rate, so you don't owe as much. Your investment gains can provide you with income, as long as you are smart about how you sell. It's also possible to use investment losses to offset some of your income, reducing your tax liability.
- Marriage penalty: Realize that there are cases, if you and your partner both have high incomes, in which your marriage can mean a tax penalty. As you both earn more money, take this into consideration during your tax planning. Married filing jointly usually makes more sense for couples in which partners have large disparities in income.
If you aren't sure about what to do about your tax situation, consult with a tax professional. There are reputable accountants who can help you figure out the best way to plan your finances for the coming year so that you get the best tax advantage.
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