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The process of individual tax planning can be a bit intimidating if you do not understand the process. However, with a little bit of knowledge, you can avoid any tax problems. Here are the basics of how to prepare for your individual tax return.
Keep Everything
When you are preparing throughout the year for your taxes, you should hang onto everything financial in nature. You need to keep all of your financial statements, receipts and anything else that may have an impact on your tax records. Many people get sidetracked and do not think about these things throughout the year. They disregard important documents along the way. Make a filing system to keep all of your potentially important tax documents.
Charitable Contributions
Throughout the year, you should keep in mind that charitable donations to qualified organizations can really help your tax bill. The more money that you donate, the more money you get to deduct from your taxable income. Establish a plan to contribute a portion of each month's income to charitable organizations. Make sure that you are working with a qualified organization so that your deduction is not disallowed. At the end of the year, you should receive a letter or receipt from the organization in order to provide proof of your donation.
Retirement Accounts
When you contribute to a retirement plan, you should also keep track of that for your personal tax filing. Accounts such as a 401k, 403b, or IRA allow you to make tax-deductible contributions to a retirement account. You can invest the funds and the earnings are tax-free as well. However, if you forget to deduct the contributions when you file your taxes, you just lost all of your advantage. Try to max out your contribution to these accounts to increase your tax benefit and your retirement savings.
Education Savings
Many parents have started utilizing education savings accounts over the years. These can be a great way to save for your child's education and get a tax break. These accounts will have a yearly maximum contribution as well. Try to max this amount out if you can and increase your tax deduction as well as provide more money for your child's education.
Health Savings Account
Another great tax advantage comes in the form of a health savings account. The government started this type of account as a way to save for health-related expenses. With a health savings account, you deposit money into a savings account at a bank and it earns interest. You then can pay your health expenses with the money from this account. Any money that you put into the account throughout the year is tax-deductible. Each year you can put as much as $5000 into the account. With the rising cost of health care, this can be a great addition to your financial planning. It can also be a pretty nice tax-deduction at the end of the year as well.
