CHARLOTTE, N.C., August 14, 2007 – Since you only pay taxes once a year, it can be easy to forget the tax implications of certain financial decisions. Here are the most common tax mistakes and how to avoid them. Remember, tax rules depend on your income and other variables, so be sure and speak with an accountant or financial advisor.
1. Ignoring your company’s 401(k) – Tax advantages abound in this retirement plan. For one thing, because contributions are tax-deferred, you’ll be paying less income tax in the years you earn. Often, your employer will match your contribution. Additionally, you don’t have to pay tax on contributions until you withdraw it, which will hopefully be in retirement when you’re likely to be in a lower tax bracket.
2. Withdrawing your 401(k) early – It’s tempting, that big chunk of cash sitting out there. Resist the temptation and look at other options for paying for large expenses like tuition or home improvement. In addition to losing future earnings, you’ll pay tax on your 401(k) distribution as if it were regular income. If you are under 59 years old, your withdrawal may be subject to a penalty.
3. Overpaying on dividends and capital gains – When reporting profits from the sale of stocks and mutual funds to the IRS, the basic calculation is the difference between the amount you paid for the stock and the amount you sold it for. But be aware that if any of your profits came from reinvested dividends or capital gains distributions, the stock or mutual fund has already paid taxes on your behalf.
4. Selling investments too soon – Long-term capital gains carry a lower tax rate than regular income. In order to be considered “long-term” however, an investment must be held for at least one year.
5. Forgetting your charity – You can deduct any donation of cash, appliances, household goods or clothes. In addition, any transportation expenses – tolls, parking, gas – you incur when volunteering for registered charities.
6. Not optimizing your medical expenses – Once your medical expenses reach 7.5 percent of your gross income, you can deduct them. Consider having any elective procedures – orthodontia, laser vision correction – in the same year as other medical expenses. In addition, any uninsured medical expenses are deductible, as well as transportation to and from treatments.
7. Omitting tax credits and deductions – Don’t forget to itemize your deductions like retirement contributions, tuition, dependent care expenses (including alimony) and interest on your student loans.
Tax deductions and expenses rely entirely on individual circumstances, so be sure to consult with your tax advisor or accountant.
About LendingTree, LLC
LendingTree, LLC is the nation’s number one online lending exchange, providing a marketplace that connects consumers with multiple lenders that compete for their business. Since inception, LendingTree has facilitated more than 20 million loan requests and $152 billion in closed loan transactions. LendingTree provides access to mortgages and refinance loans, home equity loans/lines of credit, auto loans, personal loans, credit cards and high-yield savings accounts via www.lendingtree.com and 800-555-TREE.
Launched in 1998 with headquarters in Charlotte, North Carolina, LendingTree, LLC also owns and operates LendingTree Loans sm, LendingTree Settlement Services, LLC, GetSmart®, and HomeLoanCenter.com. LendingTree, LLC is an operating company of IAC.