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Use Fall Planning to Produce Spring Savings


Colleen Hornbacker

Use fall planning to produce spring savings

As an accountant, years of experience have taught me that my clients generally don’t like to spend a lot of their free time thinking about taxes. To most, taxes can be boring and tedious. Nevertheless, if you are interested in keeping more of your hard earned money, you might want to pay attention for just a few minutes. Why? Because paying attention to your taxes in the fall can lead to big savings in the spring.

That’s right, proactive tax planning just might save you a lot of money come tax time. Many opportunities for tax reduction require action during the calendar year before you file your spring taxes. So what can you do now to reduce your next tax bill?

Optimize retirement contributions.Manyopportunities for personal tax savings are tied to health care, retirement and investment contributions. Employers generally provide just a short window of opportunity each year within which you can make changes to your contribution elections, these open enrollment periods often fall in the final quarter of the year. That means you might have some decisions to make in the next couple of months that could save – or cost – you a lot of money. Here are a few opportunities to look for:

Always contribute enough to your 401(k) plan to maximize all available matching employer contributions. Missing out on employer matching is the same as refusing free money. Keep an eye out for ROTH 401(k) plan opportunities. ROTH 401(k) plans are a new investment savings alternative being offered by many employers. A ROTH 401(k) is a blend of a 401(k) and a ROTH IRA. Like a Roth IRA, contributions to ROTH 401(k)s are made with after tax dollars, but ROTH 401(k)s have larger annual contribution limitations. As the year winds down, don’t forget about your IRA and ROTH IRA accounts. IRA contributions can help you minimize your tax liability for the current year, while ROTH IRA contributions can save you money down the road. Consider making additional contributions to these accounts in 2014.

Medical savings plans provide additional savings.Health savings accounts (HSAs) can be a valuable tool to reduce income tax. HSAs are available to taxpayers who are on high-deductible health plans. Contributions to HSA accounts are tax deductible and balances roll forward from year to year. FSAs (flexible spending accounts) are available to taxpayers with any health plan and can also provide tax savings, but you should be more cautious with FSA contributions. Only $500 from an FSA account will rollover from year to year, so make contributions with discretion.

Watch out for capital gains and other taxes.Tax rates increased substantially for capital gains and qualified dividends for high income taxpayers in 2013. Taxpayers with income in excess of $450,000 incur 20 percent capital gains and qualified dividends tax, while taxpayers with Modified Adjusted Gross Income in excess of $200,000 ($250,000 for couples) are subject to a 3.8 percent tax on next investment income. These increased rates, along with the Medicare tax on net investment income increase the importance of planning when selling investment assets.

Timely planning is the key to savings.Remember, plan now, save later. A little bit of planning will go a long way toward reducing your future tax bills, and the sooner you plan, the more opportunity for savings you will have. To get started with your 2014 tax planning, call us today.