The early days of April often usher in a sense of gloom. Winter’s worst is not quite behind us and already Uncle Sam is knocking at the door. Tax-filers know that life does not stop for tax preparations but, with just a week to go before the tax filing deadline (extended to April 18 in 2023), there are still a few tips that will help maximize your time, tax savings, and sanity.
Tip 1: File an extension. This may sound simple, and it may not be needed, but go ahead and file an extension for both your Federal and State returns. Benefits: This brings you a six-month safety net. You will be amazed at the peace of mind an extension provides for the tax preparation process.
Tip 2: Make an IRA contribution for the previous tax year. There is still time to reduce your previous year’s taxable income and create tax savings along the way. There are no age limitations for IRA contributions. If you have earned income, you can still contribute up to $7,000 (if age 50 or older) or $6,000 (if under age 50) for 2022. Do you or your spouse have W-2 income? You qualify. Are you retired but working at a part-time job? You qualify. Benefits: You may enjoy a tax deduction on the full contribution. You have up until Tax Day (April 18, 2023) to make this contribution, so cut the check, send the funds, and make that contribution right away.
Tip 3: Fully fund your HSA for the previous tax year. Are you under age 65? Are you covered by a high-deductible healthcare plan through your employer? You can still contribute $3,650 (as a solo plan participant) or $7,300 (as a family plan participant) for 2022. If you are older than 55, you are able to contribute an additional $1,000 to both of these amounts, as a catch-up provision. Benefits: Contributions to an HSA are fully tax-deductible, grow tax-free, and are also tax-free (and penalty-free) at withdrawal if made for qualified medical expenses.
Tip 4: Spend time organizing your financial records. Deciding whether you should itemize or take a standard deduction is no trivial endeavor. The standard deduction is often viewed as an easier choice, but one method may be more advantageous and result in substantial tax savings. Discerning between the two choices can only take place if your tax documents are organized and your financial records are in good order. Benefits: Potentially a smaller tax payment to Uncle Sam and more dollars in your pocket.
Your tax prep for this year’s tax season should plant seeds to improve your record-keeping for next year and beyond. This will help mitigate the anxiety and stress of that dreaded last-minute frenzy.
Smart Money Tips
- What’s your number? Do you know your “number?” Americans love a shortcut, and when it comes to putting money away for the future, we can become fixated on our “number.” That is, the amount of money you will supposedly need to amass in order to be able to afford to retire. The media and many investment companies like to use outrageous numbers that scare the daylights out of you. The common suggestion is that people who are about to retire need at least $1 million in the kitty in order to avert deprivation later on. Of course, $5 million is better; it will allow you to be, in the words of one publication, “beer and pretzels rich.” Talk about an easy way to lose sleep! First, don’t conclude that if you fail to achieve the number that someone else asserts that you need to achieve, that you’ll be consigned to an impecunious retirement. A large majority of current retirees retired quite nicely on far less than what some news article or TV talking head said they needed. Second, rather than obsessing over your number, instead focus on the basics of sound financial planning and the steps needed to achieve a secure financial future.
- Bring your lunch to work. Rather than go out for lunch, consider bringing your lunch to work. This can save a lot of money. While you’re at it, be aware of the “latte effect”. Stopping for coffee and a snack on your way to the office may be a small daily amount, however, over a long period of time this adds up. A special note to millennials: if you can get into these habits now, the savings (if you put them away for retirement) could add a hundred thousand dollars or more to your retirement funds over the course of your career.
Food for Thought
Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right for nobody owes any public duty to pay more than the law demands.
-Judge Learned Hand
Money Can Be Funny
I’m proud to be paying taxes in the United States. The only thing is –I could be just as proud for half the money.
-Arthur Godfrey
Word of the Week
cockalorum – noun (KOK-uh-lor-uhm) – A self-important or boastful person.
Origin: From Middle English cock (rooster)
It would be easy for us to become demoralized by the cockalorum who runs our department if we didn’t know that his financial life is a mess.