It's not so much our mistakes; it's what we learn from them
The 2007 filing season is over. Either you've filed or extended. Either way, you probably know the extent of the damage by now.
If you had to write a check to Uncle Sam, you may feel it's too painful to ponder how to ease the tax bite next year. Rather than run from the pain, put it to use in planning for 2008. Here are some thoughts to ponder while the pain is still vivid.
DON'T FALL BEHIND.
The hardest tax problems are those when people don't keep up on their taxes. It can happen when you reduce your withholding too much.
It can also happen when you don't keep up with your estimated tax payment obligations. If you own an interest in a partnership or an S corporation, it can become a problem in a hurry, especially if you spend the nice distributions they give you without putting them away for your taxes.
Your first quarter estimate was also due April 15. If you haven't paid it, don't delay. If you were underwithheld, fix it now while you still have more than 8 months over which to spread the pain of increased withholding.
DO THE EASY STUFF NOW
Most people who come to their tax preparers in April looking for a miracle have already squandered most of their tax-saving opportunities. These are likely to be found at work. Take advantage of the easy stuff:
- Maximize your 401(k) contribution. If you aren't at least putting in enough to get the entire employer match, you are making an unforgivable financial blunder. More is better.
- Review your health plan opportunities. If your employer offers an Health Savings Account option, think not twice, but several times before rejecting it. Many employers offer generous breaks to switch to high deductible health insurance, and most of the time you'll be financially better off with an HSA. If there is no HSA at your job, make sure you take full advantage of the cafeteria plan.
- Start funding your 2008 IRA. The main benefit of these is tax-free buildup of earnings; if you fund it now instead of next April, your money is tax-sheltered an extra year.
- If you are saving for college, put a little money away in a Section 529 plan like College Savings Iowa every month.
EXPECT THE UNEXPECTED
One of the perplexing things about being a tax preparer is seeing somebody with a $500,000 W-2 unable to raise $30,000 to pay taxes in April. You should always have some amount of cash easily available.
Some people advocate enough to pay six months of living expenses, but I think you can do with less - especially if you have some other investments, or if you have a house. If you are a homeowner, open a home-equity line of credit, and then don't use it except for emergencies - like a $30,000 tax bill.
YOU DON'T HAVE TO REPEAT YOUR MISTAKES!
One well-known self-employed taxpayer got into a bad habit of failing to use one of the retirement savings options available for self-employed taxpayers. One this mistake was pointed out to him, he got it right on his 2007 1040.
This self-employed taxpayer put $45,000 into a Simplified Employee Pension, giving himself a $45,000 deduction for, in effect, taking money from one of his pockets and putting it in another.
So while you can't change your past, you can change your tax future -- starting today!