This article was originally published on Monday, 25 February 2013 as the Money Matters article in the Guam Pacific Daily News (PDN). Click here to subscribe to the PDN.
April is approaching quickly. You have just about a month and a half to get your taxes ready for the April 15th deadline.
If you have not started, now is a good time.
It’s better to take your time and complete your taxes accurately than to rush and complete it with errors. Errors can be costly. If you cannot file your taxes by April 15th, which happens to be a Monday this year, file for an extension with Form 4868.
The past few weeks I have talked about how to prepare for your taxes and some deductions you may or may not have known about. Here are some suggestions for next year’s taxes:
•Health care reform. This has been a huge topic in the past few years over which the president, Congress and the Republicans and Democrats have had a public tug-of-war. Several new taxes were created as part of the Patient Protection and Affordable Care Act, otherwise known as “Obamacare,” and will start in 2013. Some may not be affected tax-wise by the new act but others will. A few to watch are the 3.8-percent Medicare investment tax and the 0.9-percent Medicare payroll tax.
•Maximize your contributions to your retirement plan. You can reduce your tax bill by contributing more to your retirement plan. Your contributions are taken directly from your paycheck before your withholding taxes are deducted. In other words, you are not paying taxes on the money you contributed to your retirement plan. If you have an employer that matches your contribution, that is just an added benefit and that is free money; take advantage of it! This year you can contribute up to $17,500 to your 401(k) — if your employer matches a portion or all of that, you are that much richer. If you are 50 years and older you are allowed to contribute $5,500 more to your 401(k) for a maximum total of $23,000.
Another bonus of maximizing your retirement contributions is that those payments are compound tax-deferred. Simply put, you will earn interest without being taxed. If you were to put that money in a savings account, you still will be taxed on the interest your money makes.
•Health Savings Account (HSA). The Internal Revenue Service defines a Health Savings Account as a tax-exempt trust or custodial account you set up to pay or reimburse certain medical expenses you incur. You must qualify as an eligible individual through an IRS-approved trustee such as a bank or an insurance company. The HSA trustee doesn’t have to be your health plan provider. Like the retirement plan, contributing to a Health Savings Account will reduce your taxable income for the year.
•Adjust your withholdings. If you receive a large tax refund every year you may want to consider adjusting your withholdings on your W-2. When you receive a large tax refund the government is taking your hard-earned money and holding it until they give it back to you as a refund. The government of Guam’s ability to pay refunds on a timely basis has been an ongoing issue and a topic of discussion recently. If you adjust your withholdings and get more back in each paycheck you can use that money to pay down debt, put into a savings account to earn interest, or, even better, use it to add to your contributions to your retirement fund where it can really flourish. To adjust your withholdings, fill out a new W-2 form with your employer. Another option is a Tax Refund Loan so you can have access to some of your money until the government pays your refund.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com. To read past columns visit the Money Matters blog at https://moneymattersguam.wordpress.com.