It’s hard to believe how fast 2016 flew by. You will soon start receiving all the forms and the documents you need to complete your 2016 tax return. Here are some tips for you as you think about filing your 2016 taxes
1. Make sure you contribute to your retirement plan
You have time until April 17, 2017 to contribute to your retirement account for 2016.
Your employer may offer a 401(k) or another kind of retirement plan. Make sure you contribute the maximum amount allowable since this could be a great tax savings vehicle. If your employer matches your contribution you are leaving money on the table that could benefit you in your retirement. If your employer does not offer a retirement plan, then consider making a contribution to a traditional individual retirement account (IRA) or a Roth IRA. While contributing to a Roth IRA instead of a traditional IRA will not cut your 2016 tax bill since Roth contributions are not deductible, it could be the better choice because all withdrawals from a Roth can be tax-free in retirement. For 2016, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the year). The amount you can contribute will vary depending on your tax bracket.
2. Tweak your withholding
Check your year-to-date withholding and consider changing it if you are expecting a large refund. On the other hand, if you didn’t pay enough to the IRS during the year, you may have a big tax bill staring you in the face. And you might owe significant interest and penalties too.
According to IRS rules, you must pay 100 percent of last year’s tax liability or 90 percent of this year’s tax or you will owe an underpayment penalty. If you make an estimated payment by January 15, though Form 2210: Underpayment of Estimated Tax , you can erase any penalty for the fourth quarter, but you still will owe a penalty for earlier quarters if you did not send in any estimated payments back then.
3. Donate to charities!
You can save your tax bill by donating things that you no longer need or want such as used clothing, shoes, furniture, books, toys and all kinds of household items. There are many charities eager to accept your donation and you can choose one in your neighborhood to your liking. Several charities will even offer to come up to your house to pick up your donation. The deduction is limited to the item’s fair market value, and the items must be in good condition to be deductible. If the value of the non-cash items is more than $500, then you must also file Form 8283, Non-cash Charitable Contributions. Make sure you securely keep all your donation receipts for your record keeping.
4. Itemize your deductions
Many people prefer to just take the standard deduction since it is easier but you could save a lot if you itemize in certain instances. If you own a home, live in a high-tax area or are self-employed your qualified expenses could easily add up to more than the 2016 standard deduction of $6,300 for singles and $12,600 for married couples filing jointly. In addition to often used deductions such as mortgage interest and charitable donations miscellaneous expenses are also deductible if the combined amount adds up to more than two percent of your adjusted gross income. These include tax-preparation fees, job-hunting expenses, business car expenses and professional dues. You can even deduct medical expenses that are greater than 10% percent of your adjusted gross income.
If you, your spouse or dependents had higher education costs in 2016, you may qualify for one of the multiple tax benefits available. The IRS offers a useful tool: the Interactive Tax Assistant tool to help you figure out your best option.
5. File your tax return electronically
The quickest way to receive your refund is to e-file your tax return and use direct deposit. The IRS processes electronic returns much faster than the paper ones so you could get your refund three to six weeks earlier. If you owe money, use IRS direct pay from your checking or savings account.
There are other advantages to electronic filing as well. Less than 1% of electronic returns have errors, compared with 20% of paper returns. The IRS also acknowledges that it received your return which helps you protect yourself from interest and penalties in case your paper return gets lost.