With January just around the corner, you'll soon be receiving 1099’s, W-2s, and other fun tax related information in your mailbox. If you want to avoid a big tax headache later on, consider taking some time to evaluate your situation right now.
Although it is always best to consult with a tax professional about your specific situation, we have put together a few tips for you to keep in mind.
1. Make sure your address is up to date with all entities that will send you tax forms. There is nothing worse than realizing at the last-minute that you never got that 1099 that you need to wrap up your tax return. Companies are required to mail W-2s and 1099s by January 31, which doesn’t leave a lot of extra time before your April filing deadline. If your information is up to date, it will ensure that there aren't any delays in receiving important documents.
2. Your filing status is determined on December 31, 2012. If you got married or divorced this year, it only matters what your status is as of the last day of the year. If you are legally separated but not yet divorced, you are able to file as “Single” or “Head of Household” depending on your dependents.
3. Keep records of your charitable donations. If you have been thinking about donating money or goods to your favorite charity, it may lower your taxes if you make the donation before the end of 2012. If you itemize your deductions, you can reduce taxable income by writing off donations to qualified charitable organizations. To make sure a charity qualifies for the tax deduction, use the “Exempt Organizations Select Check” on the IRS website.
4. Check your withholding. Review your withholding now to make sure you are having your employer withhold enough money from your paycheck, or that you have been paying enough in estimated quarterly taxes.
Reviewing your withholding is especially critical if your status has changed throughout the year (marriage, divorce, birth of a child, etc.). If you do not withhold enough throughout the year, you may be subject to under withholding penalties from the IRS. The IRS Withholding Calculator is a helpful tool to determine whether you need to give your employer a new Form W-4 to adjust your withholding.
5. Max your tax-deferring options. Make sure you have sheltered as much money as possible in tax-deferred plans such as your 401(k), 457, 403(b), or IRA. Every dollar that you contribute to these plans before December 31 will reduce your taxable income for 2012. If you are age 50 or older, you may be eligible for additional catch-up contributions.
6. Assess where you are with your flex account. If you have a flexible savings account (pre-tax dollars for medical and childcare expenses), now is a good time to look at your balance and try to project what expenses you might have between now and December 31. FSAs are “use it or lose it,” so you don’t want to leave any money on the table in December.
7. Fund your college savings 529 plan. If you are funding a 529 plan for yourself or a dependent, the money you contribute to the plans grows tax-free, and future withdrawals used to pay for college are tax-free as well. Although the contributions themselves are not deductible from your federal taxes, they are deductible from your Colorado state taxes.
8. Make energy-efficient improvements to your home. If you have been planning to make energy-efficient improvements, pay for them by December 31 and you may be eligible for a tax credit.
9. Don’t panic if you can’t pay. If you are having financial difficulty and don’t think you will be able to pay your tax bill come April, stay calm. Pay as much as you can before the April 17 deadline to avoid penalties and interest. More than 75 percent of taxpayers are eligible for an Installment Agreement. It is never too early to contact the IRS to discuss payment options if you know you won’t be able to pay in full by the April 17 deadline.
10. Remember Number 17. IRS Publication 17 that is. If you have any questions about your taxes, then refer to this comprehensive guide, found online here.
This post was written by Kimberly Riccardi from Colorado PERA.
(Would you like to write a guest post for The Dime? Email us at firstname.lastname@example.org.)
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