3 reasons to start your taxes now
You still have time to make some money-saving moves before the end of the year -- and filing promptly can also reduce the chance of taxpayer ID theft.
This post comes from Gerri Detweiler at partner site Credit.com.
But this year will be different. I am actually already starting on my 2013 taxes in 2013 (what a concept!) - and you may want to do the same. Yes, we're into the busy holiday season, and no, you may not have all of the information you need to complete them if you're waiting for W-2s or 1099s. But there are some good reasons to get started now and here are three of them.
1. Increase your refund
Last year, about 75 percent of taxpayers got a refund, and the average refund was close to $3,000, says CPA Lisa Greene-Lewis with TurboTax. You may be able to bump up your refund (or minimize your bill) by making some smart year-end moves. One of them, she says, is to simply clean out your closets. You have to make room for all the new stuff you get over the holidays anyway, right? Donate what you don’t want or need to qualified charities and you should be able to deduct the fair market value of those donations if you itemize.
TurboTax offers a free online tool called ItsDeductible that helps track and assign values to these deductions. It's also available as a free iPhone app where you can track and value your donations on the go.
Of course, cash donations are also welcomed by charities, and you make a donation by credit card as late as Dec. 31, and still get the deduction, as long as you have proof that it was made before the end of the year. Search for qualified charities on the IRS website.
Another strategy, if you can afford it, is to make a contribution to your 401k. For 2013, taxpayers under 50 can donate up to $17,500. If you are over 50, you can contribute up to $23,000. (You have until April 15, 2014, or when you file your taxes, whichever is earlier, to contribute to an IRA.)
2. Beat the crowds
If you are counting on your tax refund to pay off your holiday bills, you may have to wait a little longer this year. That's because the date that the IRS will accept e-filed returns may be a little later this year, due to the government shutdown.
"There will be a lot of people filing at one time," warns Greene-Lewis, "and the IRS processes tax returns on a first in, first out basis." If you can be ready when e-filing is officially opened up then you can just push a button and get as close to the front of the line as possible. (TurboTax is accepting tax returns as early as Jan. 2 and storing them securely so they can be transmitted to the IRS as soon as the agency is ready to accept e-filed returns.)
Another good reason to file quickly? Taxpayer ID theft. As Adam Levin, co-founder and chairman of Credit.com and Identity Theft 911 points out, if scammers try to file a tax return using your name and Social Security number, they won’t be successful if you have already filed.
3. Get them before they’re gone
Several valuable tax breaks -- Greene-Lewis says they're called "tax extenders" -- expire at the end of the year unless Congress acts. And while it’s been something of a given in past years that our elected officials won't let these things lapse, this year may be different. After all, who would have thought the federal government would shut down for two weeks over political wrangling?
Here are some of the tax breaks that will expire at the end of 2013 unless Congress acts.
Tuition and Fees Deduction: Also known as the "Torricelli Deduction," it allows many taxpayers to deduct up to $4,000 in tuition and expenses from taxable income. (There is a phase-out for higher income taxpayers.) One strategy: if you haven't already spent the maximum amount allowed for your tax bracket this year and you plan to take courses in the first quarter of 2014, prepay them now, Greene-Lewis says.
Teacher Education Deduction: Teachers can typically deduct up to $250 of money spent for supplies for their classroom. Educators who are eligible for this deduction and haven't already spent $250 this year may want to purchase the supplies they need for the next quarter or semester before the end of the year.
State and Local Sales Tax Deduction: Taxpayers currently have the choice of either deducting state income taxes or sales tax paid during the year, but the option to deduct sales and local taxes on purchases option will expire at the end of 2013 unless Congress extends it.
"This one is huge for people who don't pay state income taxes, like in Florida," Greene-Lewis notes. If you live in a state where there is no state or local income taxes and are planning a major purchase -- car, boat, home renovation, etc. -- you may want to squeeze it in by year end to take advantage of this deduction. (You may also come out ahead by deducting sales tax if your state or local income taxes are low.)
You'll find a sales tax calculator on the IRS website. This is the provision that allows many homeowners who have sold their home through a short sale or lost it through foreclosure to avoid paying taxes on the forgiven debt. It's a big deal, as it can often allow former homeowners to exclude tens, even hundreds, of thousands of dollars in canceled debt from their taxable income. Last year Congress extended it, but only through the end of 2013. If you are currently trying to complete a short sale, you may want to push as hard as you can to complete it by the end of the year.
More from Credit.com:
- Are prepaid cards a smart way to get your tax refund?
- 46 percent of Americans plan to save tax refund
- What to do if you can't pay your taxes
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I like the the "donate" to your 401(k). There is contributing, but donating? Funny. Do remember that the $17,500 and $5,500 (for catch up contributions for those who have reached the age of 50 during the year) is the maximum amount that may be deferred. For those in a position to do so and for plans that permit such, additional contributions may be made that do not reduce your taxable income - known as after tax contributions. Making a non-deductible contribution to an IRA and then 'back-door' converting to a ROTH is also a good move for those who have time to let a ROTH grow.
Advice for those nearing the end of a mortgage and who itemize - if you are very close to the standard deduction (in other words, the benefit of itemizing your mortgage interest, property taxes and state taxes (in general) is barely above the standard deduction) it may be time to 1. Pay your January payment in December and 2. if you determine you will likely owe or otherwise pay state tax or estimates, accelerate your state tax into 2013 by paying an estimate in December instead of waiting until January 15th 2014). This will increase your itemized deductions on your 2013 return...thereby reducing your taxable income.
Remember making accelerated payments will lessen your itemized deductions next year, but if you were close enough to the standard deduction this year, you were likely close to not itemizing anyway - at least it is one less form to file. Then, if you are in such a position, consider paying your mortgage off early in 2014 - stop letting the bank collect interest and pocket it for yourself. Save what you would have been paying on your mortgage and maybe, some day, interest rates will return to normal and your cushoin won't just be sitting earning .00025% interest.
Happy returns all!
We`ll pay more taxes because we`ve made tons of money in the markets this year.Who cares
about paying more when you`re swimming in cash thanks to Obama?
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