The end of the year is fast approaching and now is the time to start tax planning. These five year-end tax strategies for 2016 can significantly lower your tax bill. April 15th is the filing deadline for taxes, but for minimizing taxes, the key date is December 31st. Most tax breaks for retirement savings, charitable contributions, and tax loss selling must be done before the end of the year. It’s best to start early.
Organize your paperwork
Don’t wait until the last minute to look for receipts or other paperwork needed to complete your tax return. Gather tax related receipts and canceled checks, such as those from charities. Check your bank and brokerage statements for year-to-date income and gains or losses. Keep track of medical receipts and insurance reimbursements. Make a checklist of forms you anticipate receiving in the mail including W2’s and 1099’s. Doing this will help ensure all income is reported, and no deductions are forgotten. It will also allow you to file early, which can help reduce the possibility of being a victim of identity theft.
Five Year-End Tax Strategies for 2016
Consider increasing your retirement plan contributions
Contributing to a 401(k) plan or traditional IRA is one of the smartest tax moves you can make. If you are earning $50,000 a year in taxable income, and contribute $5,000 to a 401(k) or traditional IRA, your taxable income would be reduced to $45,000. For someone in the 25% tax bracket, that is a potential saving of $1,250. Plus, any earnings on the contributions are taxed when distributions are made. Contributions to a 401(k) plan are due by December 31. IRA contributions can be made until April 15, the tax filing deadline.
Protect yourself from taxpayer identity theft
The Internal Revenue Service disclosed that it has been a victim of several serious security breaches and hundreds of thousands of taxpayer information had been accessed illegally. Identity thieves use the stolen information to file forged tax returns to obtain fraudulent refunds. To minimize this risk, file your tax return as early as possible. If the IRS receives a fraudulent filing after your legitimate one, the fraudulent tax return would be rejected.
If you were affected by a breach, the IRS should have sent a notification with the opportunity to request an identity protection personal identification number (IP PIN). Remember, the IRS will not contact you by telephone requesting financial information, demanding payment or threatening you.
Defer income to next year
Assuming you will be in the same or lower tax bracket next year, you can lower your tax bill by deferring income to next year. Income is generally taxed in the year it is received, so if possible, put it off until the next year. For wage and salaried employees, this may not be an option, but perhaps you can postpone a year-end bonus until the following year.
If you are self-employed, you have more flexibility since you can delay billings so the income would be recognized the following year. On the other hand, if you think you will be in a higher tax bracket next year, you can accelerate income in the current year.
Just as you can defer income to next year, you can reduce your tax bill by accelerating deductions in the current year. This only applies if you itemize your tax deductions on your tax return. Consider making an extra mortgage payment or even prepay state and real estate taxes before the end of the year.
Contributing to charities before the end of the year is one of the most popular tax-reduction strategies. Get a written receipt for each contribution. If you use the standard tax deduction method, this strategy will not work for you.
Consult with a qualified tax professional
Tax strategies work best when individually tailored to your specific situation. For example, accelerating deductions would not be advisable if you are one of the many taxpayers who have triggered the dreaded alternative minimum tax (AMT), since deductions like state income taxes and real estate taxes are not deductible under the AMT rules.
In addition, a qualified tax professional can help identify tax credits you may be eligible for such as low-income credits, education credits, and childcare credits among others. For healthcare providers, an often-missed tax deduction is unreimbursed business expenses. These are work-related expenses you paid for personally.
Mr. Noel B. Lorenzana is an Illinois Registered Certified Public Accountant with over 20 years of experience, dedicated to providing outstanding tax and accounting services to individuals and small businesses in the Chicagoland area. Contact me to find out how I can help you optimize your year-end tax strategy.
The information presented in the above article is general in nature, and not warranted or guaranteed. Your situation is specific to you alone, so be sure to speak with a Certified Public Accountant or a trusted tax advisor. You are welcome to contact me if you would like a free consultation to discuss your tax situation.
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Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, I would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.