Prepare for Next Year’s Taxes

With tax season behind us, it is worth taking a few minutes to prepare for next year. As the deficit rises, it seems pretty difficult to imagine that our taxes won’t be going up in one form or another. A little preparation can help make sure that you pay no more than your fair share.

Tax folder

Start a folder today for 2010 tax papers. Even if you don’t put anything in it, having it ready helps make sure that you don’t accidentally misplace something when it does come in. Many people spend more time looking for tax papers than they do actually preparing their taxes.

This folder is also a great place to keep anything that will help you with your taxes. If you read about a tax credit that may help you next year, put it in the folder. If you find a good article on what types of health care are deductible, put it in the folder.

Plan retirement contributions

A bit of planning right now on how you want to approach retirement planning for next year can save you a lot of money. For example, if your income will likely be low in 2010, you might consider putting money into a Roth IRA. Your lower earnings mean you will be at a lower tax rate, so the Roth is likely to benefit you more in the long run than a tax break today.

If your earnings this year are likely to be very high, you might consider putting more money into your 401k or a traditional IRA where the tax benefit is available on this year’s earnings.

Plan charitable contributions

Your charitable contributions only help you on your taxes if you itemize your deductions. If the standard deduction were greater than your itemized deduction, you might consider an alternating-year strategy to claim a greater deduction. By making all of your charitable deductions every other year, you’ll batch them together. Depending on your particular situation, this may mean you can take the standard deduction in the off years and a higher itemized deduction in the other years.

Understand the health care bill

The changes may affect your tax strategy. One notable change: Health savings accounts used to be usable for over-the-counter medication. Now you will get hit with a 20% penalty for those purchases. There are numerous other provisions that may impact your taxes. Make sure you understand what goes into effect as the changes are phased in over the next few years.