It Pays to be Smart About Taxes
Mar 1, 2021
REAP THE REWARDS OF MASTERING THESE TAX BASICS
Albert Einstein said, "The hardest thing in the world to understand is the income tax." True, taxes can be absurdly complicated. There is some good news, however. The following simple strategies will help your income tax season go more smoothly.
MAKE YOUR RETIREMENT PLAN CONTRIBUTIONS WORK FOR YOU
Given these uncertain times, you might be tempted to reduce your contributions in order to have more cash on hand. Before you do, consider that retirement plan contributions are a smart way to lower your income tax liability. Experts advise saving between 15% and 20% of your gross income. The more you save, the more you save on your taxes.
Take full advantage of matching contributions from your employer. This exceptional benefit provides what some consider “free money” that will help grow your savings faster. It’s actually part of your pay, so don’t waste it. Also, remember to maximize personal IRA contributions to reach your annual legal limit for deferral contributions. Your money will be accessible in the event of an emergency or major life change.
SCAM AWARENESS: TACTICS FOR TAXPAYER SELF-DEFENSE
Scammers often take advantage of common tax-season nervousness. Pay attention to IRS consumer alerts, such as current warnings about phishing emails and calls that are targeting your personal financial information. The IRS never calls taxpayers to demand immediate payment using a prepaid debit card, gift card or wire transfer. Common tactics, such as threatening to revoke your driver’s license or business license, are not legal. Your Social Security number can never be canceled or suspended for failure to pay taxes. Please note, all payments must be made only to the “United States Treasury,” which includes paying on the secure IRS website. They normally mail a hard copy bill to anyone who owes taxes. Your best protection is double-checking any contact you receive, no matter how credible it may seem, on the IRS.gov website which offers crucial information on these and other scams.
HONDA FCU HELPS PUT YOUR REFUND TO WORK TOO
Taxpayers who receive refunds often behave as though they’ve been handed a bonus. Remember, this is your income that is being returned to you. Impulse purchases can be like throwing your earnings away. Instead, consider treating this money as an opportunity to invest in your future. You can arrange for direct deposit into your Honda FCU account—a perfect opportunity to leverage your funds for a special project, like purchasing a new home.
Congratulations if you’re already planning to make a financial investment. For security, check the background of your investment professional on BrokerCheck, run by the Financial Industry Regulatory Authority (FINRA). As a Honda FCU member, you can work with a dedicated professional from the MEMBERS Financial services team. This expert guidance can help you maximize your refund’s power to provide for retirement, education, family needs and more.
DEDUCTIONS: WHEN TO ITEMIZE, WHEN TO STANDARDIZE
Deductions reduce the amount of your taxable income, but they can complicate calculating how much you rightfully owe. Basically, you should itemize deductions if your allowable itemized deductions are greater than your standard deduction, or if you aren’t allowed to use the standard deduction.
Standard deductions can vary from year to year, depending on changes in tax law, but also contingent on such things as the taxpayer’s income, age and tax filing status. Some taxpayers are prohibited from using standard deductions due to residency, partnerships or changes in their accounting calendar. Even when a standard deduction is allowed, an itemized deduction might be necessary if, for example, you had large uninsured medical expenses during the year. Additional information is available on IRS.gov. However, this can also be one of the most complicated parts of the process. Working with a tax professional might save you thousands of dollars and give you peace of mind when you’re not sure whether to itemize or standardize your deductions.
FOLLOW ANNUAL TAX CODES UPDATES
Every year, the IRS updates its codes to stay abreast of the times. Make a point of staying informed. It’s good to know, for example, that charitable contributions limits were expanded for 2020 in response to the difficult economic year. Not all changes are as easily understood. To be certain of a change in code and how it might affect your own income tax liability, consult a tax professional or visit information pages on IRS.gov.
To help you get started, Honda FCU offers this free learning module on tax basics.