Corporate Relations and Business Strategy Staff
When the deadline for filing tax returns is months away, financial planning may be the last thing on your mind (not to mention your calendar). Now may be the perfect time, however, to take some simple steps that can improve your finances and lower your tax bill. This article presents some basic ways to maximize tax deductions and shore up your finances for the coming year.
Get Your Financial House in Order
Review your financial records to ensure they are accurate and up-to-date. Start organizing your receipts and financial documents in advance of tax preparation. If you are overpaying and receiving a large tax refund each year, consider reducing your withholdings and putting the extra money in an interest-bearing account. If you owe a hefty tax payment each year, increasing your withholdings will reduce the bite at tax time. You should also submit an updated W-4 Form if your martial status has changed, you've had a child or have added or removed dependents.Watch the Clock
Schedule a phone call or meeting with your financial advisor to discuss what you can do between now and the end of the year to reduce your tax burden. Some financial actions you can take have a deadline of December 31, while others extend to April 15. Tax code changes can also mean that some deductions available to you this year may change in the future. Your financial advisor can help you plan the timing of certain expenses and investments in a way that maximizes the tax benefit to you and your practice.Organize Your Payroll and Contractor Documentation
If you have employees, such as administrative office staff, you will have to file year-end payroll reports and W-2 Forms in January. Similarly, if you have worked with any consultants as independent contractors this year, you will need their Social Security or Employer Identification Numbers and addresses to file their 1099-MISC Forms.Maximize Your Retirement Contributions
Tax-deductible retirement plans are one of the most commonly used mechanisms for reducing taxable income. Verify your retirement plan's contribution limits and deadlines and, if your finances allow, make sure you reach the maximum annual contribution. If you are over age 50, you may also be eligible to make an additional "catch-up" contribution. If you don't yet have a retirement plan, talk to your financial advisor about setting one up. Not only could you save some money on your taxes this year, you will also be starting to plan for a secure financial future.Make Charitable Donations
There's no better way to get a tax deduction than by doing something that helps others. Donate money, clothing, household items, and used office equipment to reputable charities before the end of the year, so you can claim the deduction on this year's taxes. Be sure to get receipts to keep with your tax records.Review the Timing of Income and Expenses
If your cash flow can handle it, accelerating expenses and/or deferring income can reduce your taxes in the current year. For example, purchasing goods and services (such as professional journal subscriptions, travel to conferences or building or equipment maintenance) in December that you would normally pay for in the first quarter of next year can increase your deductible business expenses. Similarly, delaying payments owed to you until January can reduce your taxable income for the year. The execution and success of these strategies depend upon a variety of factors, including your accounting method, profit (loss) for the year, projections for next year, your tax brackets for both this year and next and the legal structure of your practice.Buy Office Equipment
Planning to buy office equipment next year and already have the cash on hand? If you have not already used the maximum allowable deduction for this type of asset, consider purchasing equipment before the end of the year to lower your taxable income.Consider Adjusting Your Salary
If you pay yourself a salary, get bonuses, or receive dividends from your practice, talk to your financial advisor about these payments in the context of your practice's financial performance. Depending on your practice's profit (loss) this year, it may be in your best interest to either: increase your salary, give yourself a bonus or pay out dividends; or reduce your salary, eliminate the bonus, or have the practice retain the earning this year. Although the thought of getting paid less sounds undesirable, the tax implication may more than offset the difference.Spend Down Your Flex Accounts
If you have a flexible spending account for medical or dependent care, you may need to use up remaining funds. Although these accounts can help cut your tax bill, since money is set aside on a pre-tax basis, with some, you lose any 2008 contributions to your account that you don't spend by March 15, 2009. Check your specific plan and make that appointment you've been meaning to schedule or pay that daycare bill.NOTE: The content of this article is presented for informational purposes only and does not constitute financial advice. Tax decisions can be extremely complex and should be made in consultation with your financial advisor.