Want to get a great start on your financial planning for 2013? Check out these tips on how to do your taxes for the best return, each from a top tax adviser.
Get the most from a home mortgage deduction: We talked to Lynn Wilson, lead researcher for The Tax Institute at H&R Block, who came up with five smart ways to trim your taxes."One of the biggest itemized deductions is the home mortgage," Wilson says. "Everybody knows that, but not everyone knows that it's smart to pay your mortgage bill for January by December 31 to maximize your deduction." If you need to borrow money, another way to max it out is to take a home equity loan; you can deduct the interest on a debt of up to $100,000. This can make good financial sense, say, if you're using the money to pay off debts like credit card bills with higher interest rates that are not tax deductible. Check out Wilson's other tax-trimming tips.
What everybody should know about retirement tax income. "Many people feel that once they retire they'll be paying less in taxes. They figure they'll live on less and so their tax rate will be less. That's a fallacy. Taxes could go up as years go by," says Jacob Gold, a certified financial planner and retirement coach at ING Financial Partners, who goes on to describe how he divides savings. "Different investments are taxed at different rates. We lay out three buckets of money. The first bucket contains after-tax investments. Those are tax friendly dollars because you'll only pay taxes on capital gains." The second bucket contains tax-deferred savings like 401(k) and IRA. "Uncle Sam has never gotten a penny from that. He'll take a big chunk now." The third bucket holds tax-free investments like municipal bonds and Roth IRAs. "You want to fill that bucket, but it's the toughest one to fill," Gold says.
People make a basic error in deciding how to fund their retirement. "They want to spend from a Roth IRA because it keeps their taxable income low. If you have an asset growing tax-free, you should let it continue to grow so it becomes a larger percentage of worth." Instead, Gold advises dipping into the first two buckets. Check out Gold's other tips to reduce your retirement income tax.
Don't pick the wrong tax preparer. Tax attorney Barbara Weltman is a contributing editor to a number of books from the J.K. Lasser Institute, including J.K. Lasser's Your Income Tax 2012. Here's her advice on how to do your taxes for best advantage. "Many people use paid preparers. One problem is that preparers may do a good job in filling out your return, but they don't keep you apprised of changes during the year. You miss actions that could cut your taxes," Weltman says, adding that the IRS has been zeroing in on preparers who do things that could be judged questionable. "You could be audited because they're looking at all of your preparer's clients." How to pick the right preparer? The same way you'd pick a family physician: ask for a referral from your attorney or a trusted relative or friend. Check out other common tax-filing mistakes Weltman sees and the free tax advice she offers.