By KALI HAWLK
It's the start of a new year, which means you have a few months between the end of the last tax year and the deadline to file.
While you may think there's nothing tax-related to do in January and February, there's still time to take action and improve your tax situation before filing.
Keep these seven tips in mind as you review your finances; you may discover some last-minute money moves that can reduce your tax burden or make the filing process easier.
1. Keep funding retirement accounts.
Did you know that you can fund some retirement accounts for the last tax year up until the filing deadline? Putting money into an account such as a traditional or SEP IRA not only can help benefit your financial future, but can also help reduce your tax burden.
"You can contribute to IRAs, Roths, SEP IRAs and portions of Solo 401(k)s up to the deadline (April 18, 2017) to file your taxes," explains PJ Wallin, a CPA and Certified Financial Planner™ who founded Atlas Financial. Not all retirement accounts can receive funding up to the due date for your taxes, though. "You cannot fund the employee portion of 401(k) accounts," says Wallin.
Traditional, SEP, and SIMPLE IRAs are tax-deferred. That means your contributions can lower your taxable income. Saving more in these specific accounts could mean paying less in taxes.
2. Make your last estimated tax payment for the previous year.
If you're self-employed or earned any kind of 1099-MISC income, you need to mail your last estimated tax payment to the appropriate IRS address by Jan. 17, 2017 (normally Jan. 15). The correct address varies depending on your state, and you can find each listed on Form 1040-ES. It's easy to forget this payment, since it falls after the end of the tax year -- but it's the last one due, so send it in.
3. Consider itemizing.
There are some deductions you can't take unless you itemize. But not all taxpayers will benefit from filing this way, and it's easier to take the standard deduction. This is the dollar amount you automatically get to deduct from your tax liability if you do not itemize.
Here are the standard deductions for the 2016 tax year, by filing status:
- Single: $6,300
- Married filing jointly: $12,600
- Married filing separately: $6,300
- Head of household: $9,300
- Qualifying widow(er): $12,600
Wallin explains that itemizing deductions is a second way of calculating what you owe in taxes. Itemizing is a complex process and could require the help of a CPA, but it could reduce your tax burden. If your itemized deductions exceed the standard deduction you can take, it might be worthwhile.
People who can check off some or all of the following statements may be more likely to see a payoff from itemizing on their returns, depending on their individual tax situation:
- You don't qualify for a standard deduction due to your filing status.
- You own a home.
- You can claim large amounts of charitable deductions (which usually means thousands of dollars worth of donations -- remember, to benefit you, your itemized deductions would need to exceed your standard deduction).
- You paid medical expenses that exceeded 10 percent of your income.
Wallin says that other common itemized deductions include state income taxes paid, real estate taxes and personal property taxes. He says people often miss deducting qualified, unreimbursed business expenses such as car mileage, home office, and a work cell phone.
Don't assume you'll be better off by itemizing -- run the actual numbers to find out. "Most software will do a comparison for folks, so I always tell people to assume they should itemize until they realize the itemized amount isn't higher than the standard deduction," advises Wallin.
If your itemized deductions are greater than the standard deductions provided by the IRS for your filing status, it may be worth taking the time to file this way to reduce your tax burden.
4. Check the filing date.
Double-check the deadline for filing your taxes. We're all familiar with the April 15 due date, but every now and then we get a small extension thanks to the weekend or federal holidays. Because April 15 falls on a Saturday in 2017 and the following Monday is a holiday in Washington, D.C., individual tax returns are due the following business day: Tuesday, April 18, 2017.
5. Get organized now.
Taking the time to prepare your documents now instead of the last minute can save a lot of stress. It could even save money by helping you avoid filing late, which can incur a late filing fee. If you owe taxes, you could also get hit with a late-payment fee and incur interest fees if you don't file your paperwork on time.
The fees are usually 5 percent of the unpaid taxes per month, and that starts accruing the day after the filing deadline. Fees can go up to 25 percent of your unpaid taxes, but won't exceed that amount. You may have to pay interest in addition to the late penalty.
Getting organized now can help you determine whether you need to file an extension. It also gives you more time to track down documents you need and request copies of paperwork from financial institutions and employers.
6. File ASAP.
If you expect a tax refund, you may want to file as soon as possible. Federal filing opens on January 23 this year. Once you receive all your documents and have your paperwork in order, you can file electronically and get a refund as fast as possible. The IRS processes electronic filings faster than paper returns. It usually takes 21 days to process an electronic return, and up to six weeks for paper returns.
Plus, many tax-filing software programs include the option to file electronically for free. You may be able to save money in the process and get your return back faster if you need it.
7. Adjust your withholding going forward.
Owe more than you expected for 2016? Now could be the time to adjust the withholding on your paycheck. And if you overpaid through the year, paying the right amount of income tax throughout the year ensures you don't give Uncle Sam a nice interest-free loan.
You can use Form W-4 from the IRS to calculate the right withholding, depending on your preferences. "Form W-4 shouldn't take folks very long to fill out," assures Wallin. You can also ask your employer or human resources department to help update your paperwork so you either pay less, or more, depending on your situation.
And if you're self-employed, you may want to re-evaluate how much you send in via your estimated quarterly tax payments. Try setting aside more throughout the year if you find you owe a big chunk of money when you file.
These tax tips can help keep you on track between now and April. By following them, you'll make the most of your time ahead of tax day, learn about options to consider for reducing your taxes where you can, and file on time -- or even early.
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