Many people think about taxes only in the spring, but taking a little time to think about them during the summer — when we’re already halfway through the tax year — could put you in better shape to save thousands next tax season. Here are five things you can do now to avoid tax surprises in April:
1. Tweak your 401(k) contributions
If you’re eligible for a 401(k) at work, in 2016 you can sock away up to $18,000 tax-free ($24,000 if you’re 50 or older) if the money moves directly from your paycheck to your 401(k). That could shelter a good chunk of your income from taxes and also help build your nest egg (and if your company offers a match, why are you turning down free money?). Reviewing things over the summer gives you a chance to up that contribution — or dial it back if you think you’ll exceed the limit. (Note that employer contributions don’t count toward the contribution limit.)
2. Look at your IRA contributions
Contributing to a Roth or traditional IRA can be another great way to build a retirement portfolio, so take some time during the summer to look at three things: whether you’re still eligible to contribute, whether you’re contributing enough or too much, and whether you’ll be able to deduct some or all of those traditional IRA contributions (Roth contributions aren’t deductible). Click here to see whether a Roth or traditional IRA (or some money in both) is best for you.
Before you accidentally give yourself a tax headache, remember you can contribute as much as $5,500 to an IRA if you’re under 50 and as much as $6,500 if you’re 50 or older. The contribution limit for a Roth IRA is also tied to your income and phases out at higher levels — and, if that shuts you out, you may want to see whether a backdoor Roth IRA is for you. You can always contribute the full amount to a traditional IRA, but your income and whether you — and, in some cases, your spouse — are also participating in a 401(k) affect what you can deduct.
That’s why summer could be a good time to up your contributions if you’re falling behind — or wind them down if you realize you’re no longer eligible, are at risk of going over the limit or think you’ll make too much this year to get a deduction.
3. Assess your 529 plan
If you live in a state where 529 plan contributions are deductible on your state return (check our 529 plan finder tool), get cracking on college savings this summer — it could lower your tax bill in April. There are no set contribution limits on 529 plans — the IRS simply says contributions “cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary.” Most states do set limits of $300,000 or more. The trick here is that your contributions could trigger gift tax consequences if you put more than $14,000 in the account during the year.
4. Update your receipts folder
You need documentation to back up your deductions, especially if you itemize, so take some time to make sure you’re not missing any receipts. Put paper receipts in a folder, box or bin so you don’t have to hunt for them in the spring, or try a phone-based app that lets you scan or photograph them. Having a central repository will make it easier to remember a donation or other deduction from, say, last February.
5. Ponder your life
Big life events have big tax effects. If you got a new job, bought or sold a house, got married, got divorced, had a baby or lost a loved one, talk to a trusted tax professional now about what documents you’ll need and what changes you should make to your filing status, withholding or other circumstances to avoid a huge tax bill in April.