Many of you may have recently breathed a sigh of relief, myself included, as you sent off your completed 2009 tax returns by last Friday. For those who file early and may not know, each October 15th is the last day extended returns can be filed for the prior year. For my firm like many others, we spent the last several weeks wrapping up the 2009 tax season. Unfortunately, there are now about 90 days until the fun begins all over again. For those of you looking for an easier way to go about completing your taxes or for those who will be filing their first tax return this coming year, I have some suggestions for you.
Here are several ways to reduce your worries and perhaps your taxes. The amount of taxes you pay to the IRS each year can be reduced through advance planning. Taking time to organize annual records always provides benefits. Fewer deductions are missed when the records are organized and the need to file an amended return due to errors will be less likely. Preparing a projection before the end of the year may also provide insight as to the need for additional steps, deductions, or other actions to avoid unnecessarily high taxes or a shortfall in payments.
Individuals are cash basis tax payers, meaning income is reportable when received or becomes under our control, and deductions can be taken provided they are paid within the year. Thus, once December 31st has passed, the ability to impact the year’s tax liability is limited. The tax code permits only a few deductions to be paid after the end of the year, and yet taken on the prior year’s return. Of those, contributions to personal retirement plans can provide great benefits. For filers with lower income levels, not only does the contribution provide a deduction and reduced income taxes, it also builds a personal account for use during retirement, but it may also create a credit against the income tax liability.
Another benefit to contributing to your employer’s retirement plan or an IRA is the earnings on contributions become sheltered from income taxes until withdrawn. Future withdrawals from the IRA will be taxed in the year distributions are taken. Sometimes it is not current taxes needing control, but those we expect to pay in the future. Those anticipating higher income tax rates when they retire, may want to consider contributing to a Roth IRA. Contributions to this type of IRA are after-tax, thus no deduction is taken on the return. But, future withdrawals are income tax-free when taken after five years from the opening of the account or after age 59 and a half, whichever is later.
For my regular readers, the discussion of opening or contributing to a retirement account is not new. Do so is more than beneficial, it is crucial for a successful retirement for most of my readers. When I am leading an enrollment meeting for some of my business clients, I asked the new employees whether they believe the U.S. government will provide for their retirement. When the snickering and laughter dies down, I ask if they think Social Security income will meet all of the income needs at retirement. If the U.S. government or Social Security will not be sufficient to meet their income needs, then it is obvious building a personal retirement account is key to a successful retirement.
For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.