federal taxes

Turn Last Year's Taxes Into This Year's Financial Spring Cleaning

Lars Peterson — Tue, 18 Mar 2014 10:24:11 +0000

It's tax time again, the time of year when Americans sift through the pile of papers on or near (and sometimes in) their filing cabinets in search of those elusive tax documents. Where'd the W-2s go? What happened to the 1099 from the bank?

It's also the time of year we promise to do a better job sorting and filing for next year's taxes. Make this year the year you keep that promise. Or take it a step further and make tax time an opportunity to look ahead, financially speaking, rather than only look back at last year. After all, you probably have a clearer picture of your current financial situation right after doing your taxes than at any other time.

Let's start with the tax documents, and then let's look at what else we can tidy up.

Wrangle Your Tax Documents

All that stuff you spent the day tracking down? Keep it in one place for next year. Include a checklist so you can keep track of documents as you receive them — or to know what to go looking for if you haven't. Also include on your checklist some personal info: Names, Dates of Birth, Social Security numbers for you, your spouse or partner, and every dependent you claim. These details will be handy for all sorts of other purposes, too.

Make a Simple Two Folder System for the Key Documents

Make one folder for all of your income documents such as W-2s from employers, 1099s for contract work, for interest income, gambling winnings, income from investment sales, rental income, whatever. Refer to your checklist!

Make a second folder for your income adjustments and credits. Mortgage interest is the big one here, but there are lots — IRA contributions, charitable contributions, education expenses. As you receive receipts and statements for these, just drop them in your folder. Next March or April you'll be ready to go, and probably feeling proud of your sensible filing.

Consider Digital Files

Lots of financial institutions give us the option to receive digital copies of our statements and tax documents — various 1099s for instance, or the 1098 for interest paid on student loan debt. It's cheaper for them, and it cuts down on paper waste. As you receive these, save them in specific folders on your computer (say, "Income" and "Credits"). They'll be waiting for you at tax time next year.

Every year when I'm doing my taxes I have to run out to the garage to take a look at annual car registration fees paid for each of our two cars. This year I've taken snapshots of the renewal documents with my smartphone and uploaded them to Evernote. (I could have just added them to my "Income Adjustments" folder, too.) Next year I won't have to run out to the car. I've done the same with my property tax bills. You can do this for any paper receipts you receive and would like to keep for tax purposes.

Note: Many institutions will charge a fee to access older statements. Check with your bank or lender. If you need to keep copies of these records for your taxes or for retention, be sure to download them and store them safely (whether digitally or as print outs) — and don't forget to back them up.

Reconsider Your Withholding

Most personal finance gurus advise against too much income withholding. Despite that, on average, Americans withhold an extra $3,000 in income tax every year — $250 a month. While it's nice to get a $3000 check every spring, it's not the smartest use of your money. It's not even the smartest way to get a $3000 "bonus" every year.

With the details fresh in your mind after finishing your taxes, visit the IRS' Withholding Calculator and figure out how much you should be sending the government out of every paycheck to bring that refund closer to $500. When you ask HR to make the change, also ask that they redirect the same amount into a savings account. You won't notice much, if any, change on your paystub, but you will have a growing savings account — one that's earning interest.

Create a Basic File System

I've outlined a simple two-folder file system for your taxes above. If you don't already have a file system for the rest of your Important Documents, consider setting one up.

In addition to my two tax folders, I keep several folders for my freelance work as a writer and editor (basically income and expense), and for the household I keep folders for:

insurance policies (life, homeowner's, auto, earthquake, flood [beach living!])
home maintenance receipts for repairs and supplies, as well as for major appliances
bills paid
bank and credit card statements (only recently went paperless)
mortgage documents
passports and Other Important Stuff like SS cards, birth certificates, diplomas, etc.

Start Budgeting

You have all the details on your income. And some of the details on your spending. Why not expend a little more effort to create a budget? Most banks now offer robust online tools for tracking spending on credit cards and to monitor income and spending made through checking, and savings accounts. That's a good start. You can take it a step further by using a service such as Manilla to consolidate and monitor all your bills and help you track your spending.

Evaluate Your Retirement Savings

Can you save more? Can you make a contribution now, before you file, and repay your savings or checking account with your refund? You'll get a break on your taxes, and you will have done something nice for your future self.

Now is also a good time to rebalance your funding allocation between riskier stocks and safer bonds. Depending on the performance of your portfolio over the last year, gains (or losses) have changed the balance of your investment, most likely toward riskier stocks, which may or may not be in alignment with your investment goals and risk tolerance.

Evaluate Your Debt

If you're like most Americans, you're carrying at least a little credit card debt. Maybe a lot. Do you know how much interest you're paying? Do you have a plan for paying that balance off?

Get a handle on those details and start figuring out how to get away from that debt. A good first step is to commit some of your refund to those balances.

Check Your Credit Report

Speaking of credit. You're entitled to one free look at your credit report from each of the three major credit bureaus every year. Don't visit one of those services that advertise on TV with the catchy jingles (they'll try to sell you some other services you may not need). Just go to the only annual credit report website authorized by federal government to provide consumers with reports from the leading bureaus. Find anything amiss? Learn how to correct credit reporting errors.

For more tips on Financial Spring Cleaning, join me and our Senior Editor, Meg Favreau, as well as Kristen Chase of Cool Mom Picks and Marc Karasu of Manilla on Wednesday, March 26 at 3:30pm ET for a Google+ Hangout. The Hangout will answer questions about how to de-clutter and organize your financial life this spring. Whether you’re trying to get your financial paperwork in order to prepare your taxes, or want to do some financial spring cleaning in order to simplify your life, the conversation will provide participants with helpful tips, tricks and digital tools to be more productive, get control of your money, and start spring on a fresh financial note.

This post is brought to you by Citi. Learn more about the tools Citi offers to help simplify your financial life at www.citi.com/mobile.

This content is not provided or commissioned by Citi. Opinions expressed here are author’s alone, not those of Citi, and have not been reviewed, approved or otherwise endorsed by Citi.

This article is from Lars Peterson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Preparing for the Fiscal Cliff

Philip Brewer — Thu, 15 Nov 2012 10:36:46 +0000

I'm not an alarmist on the fiscal cliff. In fact, I figure it's almost a non-issue. But that's no reason not to do a bit of preparation. (See also: Stalemate on the Debt Ceiling)

Under current law, come January first there'll be a bunch of changes to taxes and government spending:

The Bush tax cuts expire
The payroll tax holiday expires
Most government spending (except Social Security) gets cut across the board
Medicare reimbursements to doctors get cut
The Alternative Minimum Tax returns in full force
Extended unemployment benefits expire

Having these changes all happen at once is probably a bad thing. (Although, if you've been worrying about government debt, these changes a long way toward fixing things — a lot further than any other plan that's been put forward.)

Individually, most of these changes are pretty sensible. The tax increases are significant, but would bring the level of revenues reasonably close to providing for the spending that voters seem to want. The spending cuts are pretty harsh, but they're probably the best shot we've had in a generation at cutting expensive parts of government that couldn't otherwise be cut (like defense spending).

The problem is that having them all go into effect at once would probably push the economy into recession.

As I say, I don't think that's very likely. Even if we do "go over the fiscal cliff," I expect Congress will fix things pretty quickly after that. (Because fixing things after will entail cutting taxes and boosting spending — two of Congress's favorite things to do. Fixing things before is less likely, because fixing things before would entail raising taxes and cutting spending, and Congress hates to do that.)

Whether they fix things before or after isn't very important. Even if the rates are allowed to go up, there'll be no immediate effect — paychecks would only be affected after the IRS issues new withholding tables, which would take weeks. Long before that happened, Congress will have reinstated the tax cuts for almost everyone.

Still, if there is no compromise, the tax increases would be significant:

FICA would go up by 2 percentage points.
All income tax brackets would go up by 3 to 5 percentage points.
Tax rates on capital gains would rise.
Tax rates on dividends would more than double.
The child tax credit drops from $1000 to $500.
The marriage penalty would return.

The hardest hit would be two-income couples with children, but everyone would see their taxes go up.

Planning

As a "just in case" measure, here are my tips on what you ought to be doing.

Figure That Your Taxes Might Go Up

If you're making over $250,000 a year, your taxes almost certainly will go up. Maybe you'll be paying a higher rate, maybe you'll just see your deductions get capped or phased out. Either way, you'll be paying more.

If you make less, there's a pretty good chance that the cuts will be maintained. There's no guarantee, though, so you need to find some slack in your budget just in case.

If you're in one of the categories that's especially hard hit (two income couples with kids, people with a lot of deductions that face the AMT), your taxes might go up a lot — so you ought to take some time to do a little research and figure out exactly how bad it might be. Otherwise, just figure that your tax rate will bump up by 5 to 7 percentage points — and make sure that there's enough flexibility in your household cost structure to absorb the hit.

Think About Whether You'll Be Directly Affected by the Spending Cuts

If you're a government contractor, or if your employer is, figure on a 10% cut in revenues. Similarly, if you or your employer is a health care provider, Medicare reimbursements are going to drop by a lot. (Medicare coverage isn't going to fall, but the amount that doctors get paid to provide it will.)

Expect all the things that usually happen when revenues fall — lower profits, smaller bonuses, hiring freezes, layoffs, etc.

Understand That the Whole Economy Will Be Affected

Even if you're not a government contractor, some of your employer's customers (or your customers) are. And, of course, everyone's taxes will have gone up. Everyone is going to have less money; everyone will be buying less.

As I say, I think there's a pretty good chance that we'll "go over the fiscal cliff," but also a pretty good chance that a lot of it will be repealed shortly after.

My best guess is that if you make less than $250,000, the only change you'll see is that FICA will return to its old rates (a 2 percentage point jump). If you make more than that, you'll probably see higher taxes one way or another.

I doubt if we'll see the huge spending cuts currently on the books, but we probably will see spending cuts.

Taking Action

My basic advice is much the same as it always is — be a little extra frugal. Boost your emergency fund a bit. Make sure that you're not locked into paying for stuff that you won't be able to afford if taxes are a little higher.

Once you've done those things, you can pretty much quit worrying about the fiscal cliff.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Tax Law Changes For 2012: What You Need To Know

Barbara Weltman — Thu, 03 Nov 2011 16:59:55 +0000

Link:

http://www.openforum.com/articles/tax-law-changes-for-2012-what-you-need-to-know

Of course you can’t know your tax liability for next year for sure because you don’t yet know what your profits (or losses) will be. But you can get a good idea now about what the tax rules will be for next year. Tax law changes, combined with various cost-of-living adjustments, can help you plan for 2012.

Taxes on Your Profits

Most small business owners pay income tax on their share of business profits on their personal returns. Cost-of-living adjustments to federal income tax brackets for individuals mean that you can receive more income without being pushed into a higher tax bracket next year. Various other personal tax rules, including the personal and dependency exemption, the standard deduction, and the deductible portion of long-term care insurance, have also been increased due to inflation.

In figuring your profits, you won’t be able to write off as much as you can this year for the purchase of equipment and machinery. Changes include:

A decline in the Section 179 first-year expensing deduction to $139,000 (from $500,000 in 2011);
A drop in bonus depreciation to 50% (down from 100% in 2011).

Of course, Congress continues to debate the retention of these and other tax breaks that are incentives for making purchases that help the economy, so the final word on these breaks is still out.

Payroll Taxes

You may see an increase in your payroll taxes for 2012. While the tax rates for the Social Security and Medicare portions of FICA will not rise—they remain at 6.2 percent and 1.45 percent, respectively—the wage base on which the Social Security portion is figured will rise. The Social Security Administration announced a 3.6 percent increase to the wage base, setting it at $110,100 for 2012; it had been $106,800 since 2009. This amounts to about a $200 increase per employee at or above the wage base.

The FUTA tax rate remains at 6.0 percent, a decline that took effect on July 1, 2011. However, Congress is considering adding back the 0.2% surtax that had expired. This surtax was in place since 1976 and likely will be viewed as a benign revenue raiser if funds are needed to offset new tax breaks enacted as part of a jobs bill or other stimulus package.

If you are self-employed, the same Social Security wage base also applies for self-employment tax purposes. Thus, in 2012 the self-employment tax to cover your Social Security and Medicare tax obligation will rise about $400; one half of which will be deductible.

Benefits for Employees

Most of the breaks that you currently provide to employees on a tax-advantaged basis will continue to apply for 2012. However, some may increase due to COLAs, while others may decrease because of law changes that take effect next year.

Contributions to qualified retirement plans. Companies will be able to contribute on a tax-deductible basis up to $50,000 to profit-sharing plans and SEPs in 2012; the limit for the past several years has been $49,000. Benefits under defined benefit (pension plans) will be permissible up to $200,000 (up from $195,000 in 2011).
Transportation assistance. If you provide certain transportation fringe benefits, changes are afoot. The limit on the value for monthly free parking will rise to $240 (up from $230), while the limit on monthly transit passes and vanpooling will drop to $125 (down from $230). Bicycling assistance will stay at $20 per month.
Adoption assistance. Companies that pay for or reimburse employee adoption costs will be limited to $12,650 (down from $13,360 in 2011).

Bottom Line

Meet now with your tax advisor to review coming changes. This will enable you to do year-end planning to save on this year’s tax bill, as well as budget more accurately for the coming year.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: