So, you’ve filed your tax return, met the deadline and you’re done. While it’s tax season, why not take time for a financial health check and make sure your finances are in top condition?
Meeting your tax deadline can be a huge relief, but when you’ve filed your return and your head’s still in finance mode, it can be a good time to review your financial health and any plans. Think of it like your annual medical exam – but substitute your tax accountant or financial planner for your MD. Even though this year’s deadline is extended until July 15th because of the pandemic, it can never be too early to start planning your tax strategy.
Here’s our top 5 things to consider once you’ve filed your tax return:
1. To refund or not refund?
While tax reforms have steadily lowered the amount paid in refunds in recent years, the average refund is still over $2,0001. You can choose to accept any refund by check or bank deposit and spend or save some or all of it. Alternatively, you can opt to have it applied to next year’s income tax. Your choice will depend on your individual circumstances or future plans, but you may want to consider whether your income tax liability is likely to increase, or whether your spending or saving plans are tax efficient.
2. The impact of your tax situation on your day to day cashflow
Preparing your tax return can be a real eye-opener. You can see exactly how your current tax liabilities affect your overall finances. It can be a great incentive to sit down with your tax accountant or financial planner to consider ways to help minimize your tax liability in future years.
3. Maximizing investment-related deductions
Considering options to reduce your tax liability with your tax accountant or financial planner may include looking at maximizing deductions. Investing in your own future through a 401k plan, for example, not only can help you build a nest egg for retirement but can reduce your tax liability. Taxpayers under the age of 50, for example, can contribute up to $19,000 of pre-tax income in 2020, while those aged 50 and over can contribute an additional $6,5002. Investing in your loved ones’ futures is also tax deductible through a 529 plan for college expenses. IRS rules permit generous contributions, and withdrawals for education expenses are tax free.
4. Planning a house purchase?
If you’re thinking of buying a home, there are a number of tax deductions you might want to consider. These include mortgage interest, property taxes and private mortgage insurance. Home improvements that boost the energy efficiency of your home may also allow you to claim tax credits.
5. If you’re a business owner
Being a business owner brings added tax responsibilities. For a start, you’re expected to file a return even if your income is below the usual threshold. You’ll also be liable for self-employment tax alongside income tax, plus income is taxable whether you take it out of or reinvest it in the business. Working with your tax accountant or financial planner can help you identify tax deductions or credits available to you and steps you can take to reduce your tax liability in the future.
Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
Go back to our newsroom to read more stories.