Ramping up to Tax Day: 7 ways to set yourself up to save
No one likes to pay income taxes. Fortunately, you can take some of the sting out of this annual ritual by taking steps at tax time and throughout the year to reduce your tax burden.
Some tax breaks can be taken up to the last minute. Others require preparation. By the time Tax Day rolls around, it's too late.
Here's a look at seven things you can do now or later.
1. Save for retirement
One of the best ways to cut your taxes is to put money into a tax-advantaged retirement savings account. You can fund your account up to the last minute before Tax Day, but if you do it sooner, you'll have more time to boost your investment return. How much you'll save on your taxes depends on the type of retirement account you have, how much you put away and your tax bracket.
2. Organize your financial records
Many taxpayers miss out on valuable deductions because they don't keep documents they need to track how much they spent. Examples include receipts for unreimbursed employee business expenses, job-hunting costs and medical expenses paid out-of-pocket. Keep the evidence to itemize the deductions.
3. Get a mortgage
The mortgage interest deduction is one of the best-known federal tax breaks. Depending on the size of your mortgage, it can save you a lot of money at tax time. You'll have to itemize to take this deduction. You also might be able to deduct property taxes, mortgage insurance premiums and other homeowner expenses.
4. Claim your dependents
If you have children or other dependents, you might be able to claim additional personal exemptions that reduce your taxes. Get Social Security numbers for your kids so you'll be able to get all the deductions to which you're entitled.
5. Use a longer tax form
The easiest way to file your tax return is to use Form 1040-EZ. This form is so easy that in fact the EZ in the name is shorthand for "easy." But while EZ is simple, it won't save you much money because you'll have to forgo deductions you might be able to take if you use a longer form that lets you itemize. Itemization is especially smart if you're self-employed, have a mortgage or live someplace that has high state or local taxes.
6. File early, pay on time
If you expect to get a refund, filing early makes sense because you'll get your money back sooner. E-filing makes even more sense because electronic returns usually are processed faster than paper ones. If you need to file late, be sure to request an extension and make a payment of the estimated amount you owe. If you don't, you could get hit with a late-payment penalty and it could be quite costly.
7. Shop around for tax services and software
Whether you hire a pro or prepare your tax returns yourself with computer software or an online program, it pays to compare the costs. You might be able to deduct tax-preparation expenses, but that's no reason to pay more than you need to.
Published March 17, 2016
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