It’s a new year and with it comes the countless New Year’s Resolutions people make in an effort to improve themselves. While most people seem set on changing there physique (a worthy new years favorite) I want to draw your attention to a few key time-sensitive financial goals that should take priority as we enter 2017. All of these goals revolve around getting money back now as well as setting you up for future financial success by maximizing tax savings, retirement benefits, and getting back money that’s already yours.
#1 Maximizing your tax return
Do you always opt for the “standard deduction”? Most people do and never take the time to really figure out if an itemized tax return is more beneficial. Guesstimating the best deduction is guaranteed to leave money that’s already yours in the pocket of the IRS. There are so many tax exemptions out there that go unclaimed because people simply don’t know about them or how to claim them.
- Mortgage interest
- Mortgage refinance fees (points)
- Energy efficient home improvements
- Student loan interest (paid by you or your parents)
- Medicare premiums for the self employed
- Child care credits
- State sales tax
- Charitable donations
- Job hunting expenses
- Moving expenses (when moving for a job)
Do yourself a favor. Get all of your tax documents together and start looking for tax exemptions, credits, and loopholes. Google is your friend here. The IRS has many of them listed on there website which you can find here. The potential to save or get money back is huge.
I know spending 2-3 hours researching tax credits and deductions can be agonizing, but time spent on this endeavor will pay for itself in knowledge alone. How’s that possible you ask? It’s because at some point in your life your most likely going to qualify for some of these tax breaks and its up to you to make sure your educated about them. Ask yourself these questions:
- Do you ever plan on buying a home?
- Do you ever plan on having children?
- Do you plan on getting married?
- Are you or will you ever be self employed (I.E. do you own your own business)?
- Do you have student loans?
If you answered yes to any of these questions than there are tax breaks out there that you will eventually qualify for. Chances are you already have achieved some of the above and are already qualified for several tax incentives. Really the only question that remains is whether or not an itemized deduction saves you more money than taking the standard deduction.
How much is the standard deduction?
The standard tax deduction (in 2016) for a single person filing a separate tax return is $6,300. If your married and filing a joint federal income tax return that amount is doubled to $12,600. If your single and filing as the “head of household” meaning you have dependents (children, family or others) who live in your household and who you take care of, the standard deduction is $9,300.
In deciding which deduction to take you need to do some simple math. If you find that your list of itemized deductions exceeds the standard deduction amount you qualify for than your better off going with the itemized deduction. Likewise, if the standard deduction is more than the the itemized deduction than go with it.
Mark is a single 27 year old male who owns his own home. He lives in Texas where there is no State Income Tax.
- He paid $3,411.73 in mortgage interest to his bank.
- He paid $834 in State Sales Tax
- He paid $3,626.68 in property Taxes
- He paid $1,600 to his HOA (homeowners association)
- He paid $60 for previous years tax preparation fees (this includes accounting services like H&R Block)
In total his itemized tax deductions were $9,532.41. That’s more than 51% higher than what would have been his standard deduction ($6,300). This easily translates into getting back hundreds of dollars more when he files his taxes utilizing an itemized deduction versus the standard deduction.
#2 Make your IRA contributions sooner rather than later
If your not contributing to your IRA or don’t know what an IRA is, check out my post here. By maximizing your IRA contributions at the beginning of the year you enable those funds to start growing that much sooner. Currently, the maximum contribution limits are $5,500 for those under 50 years of age and $6,500 for those over 50. How much of a difference does a few months make? Well if you take the average long term return of the SP 500, adjusted for inflation and dividends, it returns an average of 7% per year.
7% per year / 12 months = 0.583% per month
The IRA contribution deadline is around mid April of every year. The deadline for 2017 is 4-17-17. Assuming someone makes the maximum contribution before January 17th they have 4 extra months on someone who waits till the deadline.
4 months x 0.583% = 2.332%
$5,500 x 2.332% = $128.26
That $128.26 may seem insignificant to some, but when you make it a financial habit every year it definitely adds up.
Over the course of ten (10) years that $128.26 you earn every year, compounded at 7% interest annually has the potential to equal $2,148.45. If you can make your money start paying you that much sooner why wait? It’s these type of financial habits that help you save and earn more money faster which leads to financial independence!
Thanks for Reading!
There’s so much we can do to make our money work for us sooner. All it takes is a little time and effort and you can find numerous ways to pay yourself or simply stop giving away your hard earned money away. By taking this principal and applying it across as many faucets of our life as possible, we as individuals can begin developing financial habits that earn us long term returns. Let me know what you think in the comments section below!