It's Never Too Early: Five 2011 Tax Tips
Here are five tips to help you get ahead of the game for 2011 taxes. Like saving for retirement, it’s never too early to begin saving on your taxes. We’ve posted a bunch of stuff about tax preparation steps you can take before Dec. 31, but there are things you can do between now and tax filing day that can impact your bottom line as well.
Tip 1: Lower your tax bill and save for retirement at the same time.
Every dollar you contribute to a regular IRA not only represents a dollar saved you’d have probably otherwise spent, but also reduces your 2011 taxes. Are you in the 25% tax bracket? If so, your $100 IRA plan contribution reduces your net income by only 75 cents (in most states, your contribution actually costs you even less, thanks to state income taxes). Everyone with earned income under 70 ½ years old can contribute to a regular IRA. Whether your IRA contribution is deductible depends on your income, marital status, and ability to contribute to a workplace retirement plan.
Tip 2: Maximize your match (and save on your taxes while you’re at it)
Taking advantage of an employer matching contribution on your company’s retirement plan is perhaps the biggest no-brainer of personal finance. Nowhere can you obtain a superior guaranteed rate of return on your money. A dollar-for-dollar match means your $100 contribution is immediately worth $200. Your broker can’t match that. Be sure to contribute at least as much as your employer will match. Also, it pays to know how your retirement savings is taxed.
Tip 3: Save your receipts to maximize your deductions.
You must save your receipts if you run a business. Even if you work for someone else, you should still retain certain receipts including those received upon making charitable donations. Not only will doing so make it easier for you to remember to deduct your contributions at tax-time, but saving this paperwork is required by the IRS. Certain job-search expenses are deductible too, so be sure to save those receipts!
Tip 4: Read the newspaper (paper or digital)
Perhaps never before in American history has the individual tax environment been in more flux than it is today. Tax laws change constantly, and it’s nothing new, but keeping yourself updated about what is going on never hurts. Luckily, tax software is always updated to reflect the most current tax laws.
Tip 5: Get in front of your changing tax situation.
If your personal situation changes from one year to the next, your tax circumstances will also. Unfortunately, the IRS won’t tell you about how those changes impact you. Rather, it’s your responsibility to take care of any new tax requirements and to do so long before the April 15, 2012 filing deadline for 2011 taxes.
Curious as to classic examples of often missed new tax responsibilities?
If you started a new business, you’ll need to make estimated tax payments each quarter: April 15, June 15, September 15, and January 15 of the following year. You must do so because there’s no tax withholding from self-employment earnings. If you’re fortunate enough to show some serious profit from your new business, you’ll be unfortunate enough to owe some serious taxes on it, too. Not only must you pay your income taxes each quarter, you’ll also have to pay in both halves of your Social Security tax and Medicare taxes. These payroll taxes, as they are known, equal 15.3% of your net earnings alone.
Another in-advance tax to-do item arises if you hire a nanny or other household employee. If you hire someone, contact your state employment office right away. In addition to the many legal requirements you’ll encounter as a new employer, most states will require you to begin paying unemployment compensation right away. Should you wait to pay this tax until the time you file your taxes, you’re likely to face a financial penalty for doing so.
Indeed, when it comes to taxes, ignorance is not bliss.