So you’ve heard before the basic rule of tax planning: minimize income and maximize expenses this year to lessen April’s tax bill. But you are just an ordinary person with a basic job getting by, living paycheck to paycheck. Tax planning strategies are for the rich, the ones who can afford to retain high fee tax gurus, right? Here are 3 strategies to maximize your cash flow this year that even an “ordinary” person can take advantage of:
Dust off that credit card
Yes, you heard me. Now mind, only use that charge card to pay for tax deductible items, not for holiday purchases. If you can pay your mortgage with a credit card, make January’s payment in late December. Not only will you get the extra interest deduction on this year’s tax return, but accelerating mortgage payments reduces the length and total cost of your home debt balance overall. Towns often accept credit cards to pay property tax bills, which are usually due in January anyway. By charging it, the January cash outlay is the same, just to a different source. And consider other card charges to make before December 31st, making them deductible: charitable contributions, medical bills, tuition payments, and job-hunting expenses.
Adjust your paycheck exemptions
What if you could get the money now from that big refund you normally get in April? After all, it’s your money, paid in through paycheck deductions you overpaid during the year. Not your employer’s fault, by the way. Rather, it has to do with your particular tax situation and how your itemized deductions flow into your tax calculation. One general rule of thumb is to run your current year earnings and estimated deductions through last year’s tax software and see basically where you come out. Then adjust the Form W-4 for the last few paychecks in this year accordingly. By the way, this works the other way too. If you usually owe or know you have under-withheld this year, you can ramp up your deductions in the 4th quarter to help minimize taxes owed in April, possibly eliminating associated penalties.
Submit those FSA receipts now
Remember that Flexible Spending Account you have with your employer, the one that allows you to use pre-tax dollars for medical expenses? Have you submitted your receipts yet? Do you have any idea of your available balance? Now is the time to do a quick recap and see where you are. You can no longer spend the money on over-the-counter medications like aspirin and contact lens solution, but you can spend it on doctor visits, dental work, and prescriptions. Evaluate your situation and plan for medical expenses to get full reimbursement from your FSA. Come year-end, you want to “use it, not lose it”.
Of course, you should always consider your unique situation in thinking about tax strategies. Early tax payments for example, might be wasted if you are subject to the Alternative Minimum Tax (AMT). If you need a little help, you could consult with your tax preparer. After all, you may be pleasantly surprised how affordable a quick review of your tax situation can be.
Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.