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Better Luck Next Year Three things you can do NOW to make this tax year easier. If you find yourself haunted by the Ghost of Tax Years Past, now is a good time to mend your ways.

  1. Fund Your Retirement
    If you can, contribute the full amount allowable by law. The number one thing is to maximize your retirement contributions, especially 401(k) or 403(b). The more you put in the more you can reduce your taxable income. (For the 2004 tax year, you can contribute up to $13,000-$15,000 if you are over age 50-on a pre-tax basis in a company sponsored 401(k) plan, or a 403(b) if you work in the public or non-profit sectors.)

    Many employers match your contributions to your retirement account up to a certain percentage of your salary, or a certain dollar amount. If you are not taking advantage of any such matching, that is free money you are leaving on the table.

    If you do not have a 401(k) or 403(b), set up a traditional IRA instead. You can contribute up to $3000 per year ($3500 if you are over age 50), and it may be tax deductible if you meet certain income requirements. If you work for a small business or are a freelancer, there are a range of retirement plans that can provide you with tax advantages, including the Keogh, SEP-IRA and the personal (or individual) 401(k).

  2. Adjust Your Withholding
    Contrary to popular belief, IRS does not stand for Individual Refund Source. The Internal Revenue Service doles out tax refund checks to more than 90% of Americans, with the average check amounting to about $2000. This amounts to a hefty interest-free loan to the government. A refund sounds very nice, but you could have had that money during the year for your investments. The ideal scenario is that you do not want to owe money, but you do not want to get more than $600 back.

    How do you do this? Get a W-4 form from your employer and adjust your withholding. If you are a freelancer, change your estimated tax payments. Make sure you are taking into consideration all the tax deductions to which you are entitled-for dependents, mortgage interest, etc. Also try to account for any major predictable fluctuations in income during the year, and while it is nice to change your withholding early in the year when taxes are fresh in your mind, you are generally permitted to make adjustments at any point in the calendar year.

  3. Track Your Deductions
    The first quarter of a new year is a great time to get organized. Make a resolution to put aside a folder or an envelope for deductions, and make sure they are in one central place. Being more organized means you are going to have the opportunity to save more on taxes for 2003. A good rule of thumb: if you do not have it in writing, it will not stand up to an audit. Hence, a better rule of thumb: when in doubt, save the receipt. Whether you prepare your return yourself using tax preparation software or use a tax professional, you will need this documentation. It is recommended to itemize any donations of goods to charities-without itemization, the maximum amount for each donation is normally $250. Other possible tax deductions that often go undocumented include car mileage for business travel (other than your daily commute), purchases of books or periodicals related to your profession, and entertainment/gifts for business associates.

OTP SIG3