You filed your tax return – Now what?
Congratulations! You finished the annual ritual of filing your income taxes. Now you can put these annoying financial matters out of your mind for another year and focus on the start of the baseball season, right?
Not so fast. Tempting as it may be to relegate your finances to the filing cabinet, in many ways, now is the best time to address a few things that will pay big dividends over the next year:
- Did you get a big refund? Before you start thinking of it as a windfall, remember that this was your money to begin with. You just gave Uncle Sam an interest-free loan last year and he is now returning it to you. Better to adjust your withholding so that next year your balance due on April 15 is close to zero. If you have been living comfortably that extra money in your paycheck should go into a systematic savings or investment plan.
- Conversely, did you owe a lot? Although most people do get refunds, it’s OK if you don’t, provided that you can afford to pay it and are not socked with a penalty. The IRS won’t assess a penalty if the balance due is less than $1000 or less than 10% of this year’s tax liability or if your withholding and credits were at least as much as last year’s taxes.
- Did you take full advantage of opportunities to defer income? With your taxes done it is now easy to see the impact of making pre-tax contributions to an IRA, 401(k) or other type of retirement account. If your employer matches your contributions and you are not maxing out the company’s share you are leaving money on the table. But even without matching, the tax benefits usually make it worthwhile to put as much as you can afford into such a plan. Although there are hardship exceptions, you should think of this money as being inaccessible until age 59 ½.
- Did you have a lot of dividend and interest income? Perhaps you should consider sheltering this with a Roth IRA. While the contributions are not tax-deductible, all growth and earnings are free of taxation up to and including the time you withdraw the money.
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