Yahoo Finance How to Get a Jump-Start on Your 2016 Taxes
You might have a strong desire to push the e-file button and forget your income taxes until next year. But that could be a big mistake, since your income tax return presents an opportunity to evaluate your financial life. Since the data is freshest right after you complete your tax return, now is the time to take a look at the numbers and see if there are any opportunities for planning your financial life in the coming year. Here's how to start your 2016 tax planning:
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
Look for tax savings opportunities. Saving for retirement can qualify you for tax breaks. If you're young and in a lower tax bracket (less than 25 percent), you could focus on building tax-free investment growth with a Roth account, such as a Roth IRA, Roth 401(k) or Roth 403(b). As your income increases and you jump into a higher tax bracket, your focus may shift to minimizing taxes. You can lower your current income through contributions to your employer retirement plan, such as a traditional 401(k), 403(b) or 457(b).
You can also structure your investments in a tax-efficient manner. If you have a lot of investment income showing up on your return each year, it might make sense to shift some of those ordinary income holdings (like bonds) into IRAs or other retirement accounts that provide tax-deferred growth.
If you're quickly approaching an income threshold that will phase out your child tax credit, student loan interest deduction or real estate losses deduction, you can use the review time to see if you can lower your income to qualify for more tax perks.
[Read: Tax Breaks for People Over 50.]
Examine whether your withholding was done in the most efficient manner. If you ended up with a large tax refund, you may want to request a W-4 from human resources to adjust your tax withholding so that you can actually use those funds throughout the year rather than providing Uncle Sam with an interest-free loan. If you had a large tax bill due, you may also want to adjust your W-4 so that you do not have to scramble to find extra funds when April rolls around.
If you have reportable income from a side job, look into whether you could benefit from opening a solo retirement plan like a SEP IRA or solo 401(k). You may want to consult a tax professional to make sure you open the right retirement account for the 1099-MISC income you earn.
Make sure you take all possible deductions. Finding every adjustment or deduction that you are entitled to could lower your taxes in the future. A little advance planning can sometimes help you qualify for more deductions. Here are some ways you might be able to qualify for additional tax savings:
-- Maximize your contributions to charity.
-- See if there were any personal property taxes paid (like those on vehicles).
-- Consider loading up your health savings account.
-- Look for miscellaneous itemized deductions, such as unreimbursed employee expenses, investment advisory fees, tax preparation fees and safe deposit boxes.
Maximize workplace benefits. Your employer may offer opportunities for tax savings you can benefit from such as flexible spending accounts. FSAs can help cover medical and dependent care costs and save you money on taxes.
Another idea is to pay for your disability insurance premiums with after-tax money. This may sound counterintuitive, since typically you try to maximize tax savings as much as possible. But if you ever do become disabled and have to use the disability policy, the government will allow you to receive the insurance benefits tax-free if you made the premium payments without a tax deduction. The benefit outweighs the negligible current tax benefit.
[Read: 10 Financial Perks of Growing Older.]
Make your income tax return tie into your financial plan. Take a look at the big picture your tax return fits into. Think about the change from last year and what the coming year will look like.
If your financial life is very complicated and provides only a limited benefit for the headache or time invested, take steps to simplify your financial life. If you have many bank accounts, several rental properties or investment transactions that take days to enter on your return (thus increasing your tax preparation fees) with no tangible monetary benefit, it's time to make some changes and streamline your situation.
While most people don't look forward to tax season, it can be a useful time of year to evaluate your financial progress. Take some time to review your return to use it as a tool moving forward. With a little advance planning you might be able to trim your tax bill and structure a more tax-efficient financial situation.
Brian Preston and Bo Hanson are fee-only financial planners who host the podcast, "The Money-Guy Show".
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