6 questions to ask at tax time
March 20, 2013
As April 15 approaches, many Americans are still scrambling to get their tax returns together. But while meeting the tax deadline is important, this is also a good time to be thinking about next year's taxes.
As the 2012 tax season fades in the rear-view mirror, now is the time to make a meaningful difference to your 2013 taxes. Here are six tax-time questions to prompt you to explore the possibilities.
1. Are you maximizing your tax-advantaged savings opportunities?
For the 2013 tax year, the maximum amount you can contribute to an IRA rises from $5,000 to $5,500. Plus, if you are over 50, you can contribute an extra $1,000. Contribution limits on 401(k) accounts rise from $17,000 to $17,500, and some plans allow people over 50 to make an additional "catch-up" contribution of $5,500. So, even if you've been making regular contributions to your retirement plans, you have the opportunity to boost those contributions -- especially if you turn 50 this year.
2. Have you prioritized your retirement contributions?
People often can't afford to maximize their 401(k) and IRA contributions, so you'll want to make sure they are properly prioritized. In particular, if your employer makes any kind of a matching contribution on the 401(k) plan, you'll want to make sure you contribute enough to that plan to get the maximum matching amount available before you direct anything to your IRA.
3. Are your taxable investments and tax strategy well coordinated?
In completing your 2013 tax returns, did you find your investment strategy yielded a high proportion of short-term gains? If so, you may be in a high-turnover, trading type of strategy that isn't always best for a taxable account. Tax considerations should rarely interfere with specific investment decisions (the investment consequences generally outweigh the tax impact), but the strategy in general should be suitable for a taxable account.
4. Do you have an effective record-keeping system?
If you spent time scrambling to find records and receipts so you could do your 2012 taxes, resolve to make it easier next year. Whether it's putting paper copies in a designated folder or scanning records into a mobile device, things will go much more smoothly if you put things in the right place as they come in.
5. Do your payroll deductions line up well with your tax liability?
Conventional wisdom is that you should avoid having a tax refund, but with savings account rates near zero, this is less of a consideration. The main thing is that neither your tax refund nor tax liability should be particularly large. If either was too big this year, check your deduction assumptions for 2013, and watch the monitoring points (such as your investment gains and losses, savings account interest, etc.) that may indicate whether your tax liabilities are on on track with your assumptions throughout the year.
6. Are you paying the right amount for tax preparation?
Shop around a bit. Given what's at stake, cheapest isn't always best, but it is a competitive business that has been made more efficient by technology. Make sure you are paying a competitive rate for a service you respect.
A little thinking ahead might not only make your tax bill more manageable, but also reduce the time and expense of getting your tax returns prepared next year.
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