Even with years of experience, the process of reviewing your records and filing your tax return can be stressful. With the April 15 tax deadline getting close, consider trying these five strategies that may help you lower your 2014 taxes, enhance your retirement readiness and help you get more organized for 2015.
1. Leverage your retirement accounts
If you currently have an individual retirement account (IRA), you have up until April 15 to make any contributions for the 2014 tax year. That means you may be able to lower your taxable income for 2014. The contribution limit to an IRA for 2014 is $5,500 (or $6,500 for those over 50) so try to reach that number before the deadline. Eligibility for an IRA tax deduction depends on your marital status and whether you or your spouse has a retirement plan available at work (such as a 401(k) account).
If you don't have an IRA, begin planning for tax seasons to come by taking full advantage of tax-advantaged retirement accounts such as a 401(k), especially if your employer offers a match program. Doing this will help reduce stress as you file your taxes next April, as well as relieve future stress around retirement planning.
If you're self-employed, there's also still time to open and fund an SEP IRA (Simplified Employee Pension Individual Retirement Account) for 2014. You can invest up to 25 percent of your self-employment income or $52,000, whichever is less (this will go up to $53,000 for 2015).
Contributing money automatically out of your paycheck to a workplace retirement plan such as a 401(k) provides you with tax-deferred growth on savings while also lowering your taxable income for the year. The money you contribute to your 401(k) is made on a pre-tax basis and grows income tax-deferred, which means that you generally don't pay taxes on the contributions and earnings until you withdraw these funds, typically at retirement age.
2. Get organized
Whether you will be hiring a professional or completing your return on your own, organize your records in a clear manner to ensure that you have all of the documents you need. Otherwise, you might fail to report all of the income, interest or dividends you earned to the Internal Revenue Service (IRS). This could result in federal income tax penalties and interest or, in the worst case, a tax audit.
In order to avoid any issues, review a copy of last year's tax return and put together a list of every source of income you reported. Then, make sure you have all the documents -- 1099s, W-2s, interest statements -- that align with these sources for the year. If you made new investments last year or earned income from any new employers, double-check that you have those records too.
To make sure you haven't missed any expenses you can write off or income you need to include, consider using an online tax checklist. Tax software programs could be another viable option as they ask a variety of questions that could help remind you about purchases that affect your tax bill.
3. Take advantage of workplace benefits
If you run your own or operate a side business, you may be able to write off many costs by claiming a variety of deductions for business expenses. Examples of these would include travel expenses or costs associated with running and maintaining your home office.
If you work for a company and used a flexible spending account (FSA) to help pay for health care or child care expenses last year, the amount you contributed to the account is not subject to tax. This means that your taxable earnings may be significantly less than you think. It is however, important to remember that you will forfeit any funds you contribute but don't end up spending.
4. Don't go it alone
If you're confused about completing any portion of your tax return, don't wing it. Call in a trained tax professional for assistance. This is the time of year when many people look at their finances as a whole, so it is also a good time to consider talking to a financial advisor to discuss your current finances, retirement readiness and long-term financial security. Comprehensive financial planning often requires the help of a professional, especially as retirement approaches.
5. Start planning for next year, this year
While you're dealing with your taxes, think about how relieved you would be if you were better prepared a year from now. The key to making your next tax return season less stressful is to stay one step ahead by getting organized and having a plan.
A little bit of work in advance can save a lot of time and effort in the long run. Start by collecting receipts in envelopes or files labeled with specific tax categories, such as work expenses, medical expenses or investments. Keeping digital files is another good way to stay organized. The key is to have an organization system that works for you throughout the upcoming year and can help you stay better organized next tax season.
Also, take a look at your periodic tax withdrawals to make sure they are appropriate. Did you get a lot of money back this year, or owe money? If so, you may want to adjust your deductions so that next year you are more on target.
These tips can make filing your return a less stressful process and build your long-term retirement security at the same time. If you thoroughly prepare, take advantage of tax-advantaged savings vehicles, and stay organized, you put yourself in a position to save time and money in the long run.
This is not intended to be legal and/or tax advice.
James Nichols is head of Retirement Income and Advice Strategy for Retirement Solutions at Voya Financial, one of the largest retirement platforms, product and service providers in the United States. In his role, Nichols is responsible for overseeing Voya's advice and guidance platform to meet the evolving needs of approximately 48,000 institutional clients and over five million individual customers. Nichols is also responsible for developing and executing Voya's retirement income strategy, which seeks to provide retirement income and advice solutions for all Americans.
James Nichols is a registered representative of Voya Financial Advisors, Inc. and Voya Retirement Advisors, LLC (members SIPC)