Tax season is still a few months away but that doesn’t mean you can’t start working on your strategy now. There’s still time to do a few things that can have a significant impact on your tax filing. The choices you make could mean the difference between getting a fat refund or owing even more money to the IRS. If you’re looking for ways to minimize your tax liability, here are five moves you should make before the new year.
1. Review your previous year’s return
Taking a look at last year’s return is a good idea if you’ve experienced any changes that could substantially affect your tax filing. If you’ve gotten a huge pay raise or your income has taken a serious nosedive, you’ll need to account for that when it comes to estimating whether you’re paying enough in taxes.
The same is also true if there was a major life event, such as a marriage, divorce or the birth of a child. The more aware you are of what can cause your tax bill to go up or down, the easier it is to look for possible deductions and credits.
2. Check your withholding
Unless you’re self-employed, your employer should be holding back a specific amount of your pay each week for federal tax withholding. The amount that’s withheld is based on the number of allowances you claim for yourself and your dependents on your W-4. If you’re not paying in enough taxes through the year, you’ll end up owing once April 15th rolls around. If you’re parting with more of your paycheck than you need to, you’ll get a refund.
This is where having last year’s return comes in handy. If your income and deductions are pretty much the same from one year to the next, you can compare the numbers from your most recent pay stub to see if your withholding is on track. The IRS also offers a withholding calculator that will run the numbers for you to see whether you’ll end up over or under at the end of the year.
3. Max out your retirement accounts
If you’ve seen the size of your paycheck grow exponentially, making contributions to your retirement account can help to offset the increase in your tax liability. As of 2014, you could defer up to $17,500 of your salary into your 401(k). Doing so reduces your taxable income which can be a major boon if you’re in danger of being pushed into a higher tax bracket.
Socking away money into a traditional IRA is also an option if you’re not eligible to participate in an employer’s plan. With this type of IRA, you can generally deduct your contributions up to the maximum limit of $5,500, based on your income. You’ll still have to pay taxes on the money when you start making qualified withdrawals but claiming the deduction now may be a smart choice if you expect your tax bracket to be lower once you retire.
4. Extend your generosity
Donating money or goods to a church or other charitable organization leaves you feeling warm and fuzzy but it also adds up to a decent tax write off. Generally, you can deduct contributions equaling up to 50 percent of your adjusted gross income for the year for donations made to qualifying organizations. You can use the IRS Exempt Organizations Select Check tool to make sure your charity is eligible.
If you’re planning on giving to a nonprofit, you need to make sure you’re documenting any donations you make. For cash donations, you’ll need a receipt showing the amount that was donated, the date and who you gave the money to. For donations of things like clothing, household goods and other items, a receipt listing each item and its approximate value is required.
5. Plan ahead for health insurance-related penalties
Health care coverage is now mandatory for all taxpayers and if you don’t have it, you could be facing a penalty once you file your taxes. The IRS does allow for certain exemptions which wouldn’t require you to be covered. Examples include individuals whose income is below the minimum threshold for filing a return or people who don’t have health insurance for religious reasons. If you didn’t have coverage in 2014, the penalty is either 1 percent of your household income for the year or $95 per adult, whichever is higher.
You’ll also have to consider how taking a federal subsidy for health insurance premiums may affect your tax filing. The subsidy is designed to reduce the cost of being insured for people who purchased coverage through the healthcare marketplace. If you think your income is on pace to end up being higher than what you originally estimated, it could reduce the amount of the premium tax credit you qualify for and potentially boost your tax bill so it helps to know what to expect.
Winter is coming and tax day won’t be too far behind. What you do between now and then can determine whether you end up in the red or black once April 15th rolls around.