Filing your tax return is a once-a-year event, but there are things you can do throughout the year to help reduce your tax burden and protect your assets.
BOOST YOU RETIREMENT SAVINGS
One of the best ways to lower your tax bill is to reduce your taxable income. You can contribute up to $18,000 to your 401(k) or similar retirement savings plan in 2016, plus a catch-up contribution of $6,000 if you are 50 or older by the end of the year. Any money contributed to the plan is not included in your taxable income.
Whether or not you have a retirement plan at work, you can contribute up to $5,500 to an IRA plus an additional $1,000 if you are 50 or older. Depending on your income and whether you participate in a retirement savings plan at work, you may be able to deduct some or all of your IRA contribution. Or you can choose to forgo the upfront tax break, again depending on your income, and contribute to a Roth IRA that will allow you to take tax-free withdrawals in retirement
TAKE ADVANTAGE OF EMPLOYER BENEFITS
If your employer offers a medical reimbursement account, or flexible spending account, consider contributing to this plan to help save tax dollars. These plans let you divert part of your salary to
an account from which you can then pay medical bills. You avoid both income and social security tax on the money; this can save you 20% to 35% or more compared with spending after-tax money. A word of caution, though — this is a “use or lose” deal. You must use all funds in a medical reimbursement account before the end of the tax year (or for an additional time period that your company’s plan allows), or the funds will be forfeited. The maximum you can contribute to a health care flex plan in 2016 is $2,550. Employees can exclude up to $5,000 of employer-provided dependent care assistance from their gross income. The excludable amount is not subject to income, social security or Medicare tax.
If you plan on making a significant gift to charity, instead of cash, consider giving appreciated stocks or mutual fund shares that you have owned for more than one year. Doing so supercharges the saving power of your generosity. Your charitable contribution deduction is the fair market value of the securities on the date of the gift (not the amount paid for the asset) and you never have to pay tax on the capital gain/profit. However, do not donate stocks or fund shares that lost money. You would be better off selling the asset, claiming the loss on your taxes, and donating cash to
Keep track of what you spend while doing charitable work – from what you spend on stamps for a fundraiser, to the cost of ingredients for casseroles you make for the homeless, to the number of miles you drive your car for charity (at 14 cents a mile). Also, clean out your closets on a regular basis to donate items you no longer use and reap the tax benefits. Add such costs with your cash contributions when figuring your charitable contribution deduction.
There are millions of people each year who have their identities stolen. There are ways to help minimize this possibility. Be sure to choose strong passwords and PINs. Also, beware of phishing scams, take care when shopping online, shred important documents, and check your credit reports on a regular basis.
Choose the best form for your business: a sole proprietorship, a subchapter S corporation, a C corporation or a limited-liability company (LLC). Your choice will have an impact on your taxes.
If you own your own business, keep accurate and complete records. There are some inexpensive computer programs that handle basic record keeping for a small business and can really help come tax time. Be sure to keep your business expenses separate from your personal expenses.
Consider taking a home office deduction, if you use part of your home regularly and exclusively for your business. If you have a home office, you can qualify to deduct some costs that are otherwise considered personal expenses.
IRS TAX NOTICES
If you receive a tax notice from the IRS, do not assume that it is correct. Most IRS notices are computer-generated and have not been reviewed by a human before they are sent to you.
You have the right to dispute the notice. You should respond in a timely manner with supporting documentation and use certified mail so you have proof that your response was received.
If you do receive a notice that is correct and you owe the tax, you may need to amend your state tax return, as you may also owe additional state income tax.
If you got a big tax refund or owed a lot of tax when you filed your tax return, consider adjusting your withholding. Filing a new W-4 form with your employer allows you to fine-tune the amount withheld so it more closely approximates the amount of tax you expect to owe.
Remember to keep track of your job-hunting costs. As long as you are looking for a new position in the same line of work, you may deduct job-hunting costs. If your search takes you away from home overnight, you may deduct travel expenses such as the cost of food, lodging, and transportation. These costs may be deductible to the extent they exceed 2% of your adjusted gross income.
A tax credit is available to homeowners who install alternative energy equipment. The credit equals 30 percent of what a homeowner spends on qualifying property, including labor costs, for items such as solar electric systems, solar hot water heaters, geothermal heat pumps, and wind turbines. There is no cap on this tax credit, which is available through 2016.
AFFORDABLE CARE ACT
Have health insurance or be prepared to pay the price at tax-filing time. The price keeps going up. The individual responsibility payment penalty for not having minimal essential medical coverage is based each month on the number of uninsured members of your family and your household income. An uninsured household of 3 or more during the 2015 tax year could face a maximum penalty of $975. The maximum penalty for the 2016 tax year skyrockets to $2,085.
FOREIGN BANK ACCOUNTS
Report all income received from foreign financial accounts. Additional disclosure may be required if you have an interest in or authority over a financial account located outside the U.S. and the aggregate value of all foreign accounts is $10,000 or more. The penalties for failing to file the appropriate forms can be substantial.
For more tips on how to minimize your tax burden and keep your hard-earned money in your pocket, consider attending one of BWFA’s seminars, such as one scheduled in May: Start Planning Now for Next Year’s Tax Return. Watch your email for an invitation or call us for additional information and to register.