4 Tax Moves to Make This September
For most of us, September isn't exactly the most popular month to start thinking about taxes. But now that we're only about a quarter away from the close of 2016, it's a good time to make some strategic tax moves. Here are four to strongly consider.
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1. Max out your retirement contributions
The more you save now for retirement, the better off you'll be down the line. But there are also some up-front benefits to saving for retirement -- the more you put into a tax-advantaged account like a 401(k) or IRA this year, the more you can lower your taxes.
Let's say you make $60,000 a year and your effective tax rate is 25%. Without any tax deductions or write-offs, you'll lose $15,000 of your income to taxes. But if you contribute $10,000 to a 401(k), you'll only be taxed on $50,000 of your income, which means you'll lower your taxes by $2,500 off the bat.
While it's always a good idea to contribute as much money as possible to a retirement account, you should especially consider doing so if you have reason to believe that your tax burden will increase this year. If, for example, you're planning to sell some investments at a gain, you can offset the taxes you'll face by increasing the amount you put into your 401(k).
2. Review your flexible spending account
Any money you contribute to your flexible spending account goes in on a use-it-or-lose-it basis. If your effective tax rate is 25% and you contribute $2,000 to an FSA, you can save $500 on taxes. But if you leave a portion of that money untouched, you're essentially throwing it away. Rather than let that happen, review your balance now and find ways to use it up. If, for example, you're due for a diagnostic procedure in January that you know will cost $300 out of pocket, see if your insurance company will allow you to do it a few weeks early and use this year's FSA balance to cover that cost. Similarly, renewing your eyeglasses or contact lens prescription a few months early could help you use up a balance that might otherwise go to waste.
While you do have until the end of the year to deplete your FSA balance, don't wait till November or December to schedule those appointments or procedures. You may come to find that your go-to doctors or facilities are booked through year-end or closed around the holidays, and if that happens, you'll risk kissing that balance goodbye.
3. Make your estimated tax payment -- and review your payments to date
If you're self-employed or have a major source of income other than your primary job, you'll need to make quarterly estimated tax payments to the IRS. The next tax installment is due on September 15, so make sure to get your payment in on time. But more so than that, now's when you should review your tax payments to date and make sure they're on target. While underpaying your taxes can result in penalties when you file your return, overpaying your taxes isn't a good thing either. Paying more taxes than required is basically the same thing as giving the government a free loan. If you find that you've overestimated your taxes thus far, you can adjust your September payment accordingly to hang onto more of your money.
Need help figuring out how much you owe? You can use this handy tool to get started.
4. Clean out your closets
Decluttering may not seem like a strategic tax move at first, but if you come across a number of items you no longer need, you can donate them to a registered charity and take a tax deduction in the process. All you need to do is obtain an itemized receipt for the things you decide to donate. While you technically have until the end of the year to donate to charity and get a deduction for 2016, some people fall into the trap of waiting till the last minute and getting too caught up in the holidays to make time for a Goodwill run. Better to tackle that cleanout now and lock in the tax benefits involved.
Before you get too swept away in the allure of leaf-peeping and pumpkin lattes to think about all things IRS, schedule some time to review your tax situation and take action accordingly. A bit of extra planning this September could pave the way for a smooth, hassle-free tax filing down the line.
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