By Julie Morris
Few people look forward to tax season, unless they’re anticipating a large refund. Even if a refund is likely in your future, you still have to deal with the headache of getting all your financial information in order, documenting your deductions, charitable contributions, and tax-deferred savings, figuring out if you’re eligible for tax credits, and more. In short, it’s no picnic. However, there are a few things you can start doing now to prepare for next tax season and make that looming April 15th deadline a bit less intimidating.
Donate to Charitable Causes
If your income is higher this year, you might fall into a higher bracket, resulting in a bill rather than a refund if you didn’t plan for it. Reducing your taxable income is the only way to avoid paying more in taxes. Fortunately, there are a few ways to do this, one being donations to charitable causes. Even cash contributions can add up, so be sure to keep track of all the donations you make to qualified charitable organizations throughout the year.
Aside from the benefits, giving back just feels good. If you have some clothing or other household items laying around that you no longer have use for, consider donating them to a charity such as Goodwill or the Salvation Army. These organizations will gladly give you a receipt for your donations, which you can use to take a deduction based on the value of those used items.
Contribute to Tax-Deferred Savings Accounts
Another way to reduce your taxable income is to contribute to tax-deferred savings accounts, such as retirement savings accounts (like a 401(k) or IRA). These options allow you to stash away money for the future – your retirement – without paying taxes on that money. Today, that is. Tax-deferred means that those funds will eventually be subject to taxation whenever you withdraw them.
College tuition savings plans (state-sponsored 529 plans), on the other hand, enable you to save money for your children’s college education tax-free. These plans are not tax-deferred, but tax-free – provided they’re used to pay tuition at a qualified higher education institution.
Streamline Ongoing Documentation to Simplify Filing
All of these contributions and donations have to be documented, along with your income, job-related expenses, and other financial details. One of the most important steps you can take now to eliminate the headaches associated with filing time is to start using software to keep track of your financial details throughout the year. Even business owners can simplify tax time through the use of software for payroll, W-2, and 1099 filing.
Software such as QuickBooks or FreshBooks can help you keep track of income from various sources, the expenses you incur doing work for charitable causes, job- or business-related expenses that qualify as deductions, and more all year, shaving hours off of the time it takes to prepare your tax information for your accountant or tax prep professional.
When you’re diligent about documenting your income, expenses, and contributions throughout the year, you can easily get a picture of your financial status anytime by running a report. If it looks like you’ll be facing a bigger bill than you’re prepared for, use strategies such as contributing to a tax-deferred savings account or a college savings plan to reduce your taxable income in time for it to count.
Julie Morris is an entrepreneur, educator and president of a great Photo Scanning Service and Digital Imaging Company. @JulieAnnMorris.