Once the tax returns are filed, people generally want to forget income taxes for a while. This is not the right approach. The time just after filing the returns is the apt time to think over and reflect on the process, what could have saved tax and what to do better next year to reduce tax payments in a big way. This is the time when the rules and policies are fresh in the minds so as to proceed with the tax-saving benefits analysis. Here are some of the benefits, which people usually miss to consider while filing returns.
Roth IRA – The retirement benefits of IRA can be considered as a good option to invest money in, thereby reducing the taxable income portion for the current year. However one tends to forget that future withdrawals from the 401K plan attract at least minimum tax rates. This is the reason why most of the younger generation today opts for the Roth IRA schemes.
The youth, at the start of their careers, are eligible for a lower tax bracket and they contribute to the Roth IRA schemes from after-tax money. The best benefit of this scheme is that in the future, when these people become old and tend to withdraw money, both the contribution and the earnings of this scheme that can be withdrawn is totally tax-free.
Flexible Spending accounts – These accounts are the only way out to save taxes on expenses related to medical, child care and other personal reasons. Most of the companies offer their employees, a part of their salary in the form of these FSAs. The traditional IRS rule does not allow any deductions for medical expenses if these expenses do not exceed 7.5% of the adjusted gross income. Hence this scheme is taken by people who do not have huge medical expenses and yet need deductions that can be offset by other deductions that are not allowed like property tax and state income tax.
Proper Asset Location – Classifying assets is more important than holding the assets themselves. It is important to classify the assets correctly into the taxable, tax-deferred and tax-free pockets of one’s portfolio. It is a smart move to place the bonds in the tax-deferred category as even if one gets to sell these instruments, the tax need not be paid immediately. It is also wise to keep stocks in the taxable category because this is sold rarely and tax needs to be paid only upon sales.
Performing a Roth conversion in a Low-income year – When income levels drop, there is an option to convert the benefits from the IRA model to the Roth model for a nominal charge. This converts the income from the taxable category to the tax-free category. Partial conversion of benefits into the Roth model is also possible.
These are the schemes that are part of the daily lifestyle of the taxpayers. However one needs just to twitch in here and there to maximize these for one’s benefits.