As we head further into the new year, you may have shifted your financial focus to Tax Day (now only 10 weeks away). Tax season can seem like a pain, but with some forward-looking planning, it becomes far less daunting. Taxes are often our single largest expense, so they’re crucial to consider in your financial planning year-round especially as minimization strategies could change under our new administration.
Here are 12 tips to help you prep for tax filing this year and steps to take to minimize your tax burden in years to come.
1. Get organized as soon as possible (and try to stay that way).
This may seem like a no brainer, but the sooner you get your receipts and information together, the better off you’ll be in April. Make sure you take into account home improvements, charitable donations, business expenses, etc. A CPA will be able to help you with your individual tax situation. If you need referrals, we’d be happy to give them to you!
2. Keep important due dates in mind. Dates are a key component to tax planning. Don’t forget:
April 1, 2017: First Time Required Minimum Distributions are Due (see next tip)
April 18, 2017:
2016 tax return or tax return extension form is due
1st quarter tax payment due (From 1040-ES) if you’re self-employed or have income that requires quarterly estimated taxes be paid.
This is also the last day that you can contribute to your retirement accounts (IRAs or Roth IRAs) for 2016. We recommend that you try to max these out every year.
June 15, 2017: 2nd Quarter 2017 estimated tax payment due
September 15, 2017: 3rd Quarter 2017 estimated tax payment due
October 16, 2017:
If you got an extension on your return, it’ll be due today!
Last chance to undoing a Roth Conversion for 2016. This could be good if your IRA lost money since the time you originally converted.
December 31, 2017: Last day to take your RMDs and have eligible charitable contributions count toward your tax returns for the year.
January 15, 2018: 4th quarter estimated tax payment due
3. Are you 70.5 or older? Don’t forget your Required Minimum Distributions!
First time dealing with RMDs? Depending on when you turn 70, your first withdrawal may be required to be taken by April 1 and December 31 every year after. If you forget, you could be hit with an unnecessary 50% penalty tax. You’re also allowed to donate up to $100,000 of your RMD to a 501(c)(3) organization to lower your tax burden. You worked hard and saved, have a strategy for your RMDs and don’t let a late penalty diminish your savings.
4. Be sure to employ tax diversity in your retirement plan.
When it comes to retirement, having accounts that receive varying tax treatment is like playing a stronger card game with the IRS when it’s time to withdraw from your accounts. Aim to not only have money in the traditional taxable investment like your 401(k), but also in savings accounts and after-tax accounts like a Roth IRA that are contributed to after-tax, but growth and principal are withdrawn tax-free! A trusted financial advisor can help you discover how much you should have in each bucket and strategize which account to pull from and when to minimize your overall tax burden.
5. Understand tax basics and the difference between the terms tax credit, tax deduction, tax deferrals, and tax-free.
A tax credit is a dollar for dollar benefit. A tax deduction is worth your highest marginal tax bracket, for instance 28 cents on the dollar. In this instance if you spend $100, you would get $28 back. Tax deferrals are those that you see with accounts like a 401(k) where you pay taxes at a later date. Tax-free means you owe no tax.
6. Be safe with your online filings.
Online tax filings allow for greater convenience, but also leave us more vulnerable and susceptible to cyber-security threats if we’re not careful. Last year, hackers gained access to 700,000 accounts by making false returns and getting through security on a tax filing application. Be sure you’re using a secure browser if you are going to file online and keep your Social Security number safe. You’ll also never receive an email from the IRS, so avoid opening and responding to those cyber-attacks. If you are a victim of tax fraud, always check your credit reports and notify law enforcement as soon as possible.
7.Give to others and give back.
While you may have missed the deadline for gifts and charitable donations to count toward your 2016 taxes, there’s never a bad time to give back. When gifting to loved ones, you’re able to gift $14,000 to as many as you’d without facing a gift tax and your loved ones will never pay income tax on the gift. You could also be eligible also receive tax credits or reductions for helping with educational costs. When donating to charity, the higher tax bracket you are in, the lower the actual cost of the donation as you can deduct it from your income tax. For instance, if you’re in the highest tax bracket, a $100 donation really only costs you about $60. When donating items, don’t forget to fill out written documentation of donations over $250, appraisals for items over $500, and understand the rules for bigger donations like cars.
8. Don’t be afraid to pay off your house just because you don’t want to lose the mortgage tax deduction.
Mortgage tax deductions don’t always add up to what you think it will. Depending on your individual situation, you may be better off paying it off completely than continuing to earn the mortgage tax deduction. Entering retirement without a mortgage payment can also be a great way to relieve pressure on your retirement assets and reduce your monthly outflow.
9. If you start consulting in retirement, don’t forget the self-employment tax time bomb.
Many people don’t put away taxes as the income is earned. When self-employed, you pay tax at your highest marginal rate plus another 15% for a self-employment tax. This can mean serious implications for your financial health if not understood or planned for.
10. Take care of your Medicare taxes.
If you’re a high-wage earner, you’ll have to pay additional taxes beyond what your employer takes out of your paycheck for Medicare. This year, for earned income above $250,000 for joint filers ($200,000 for single), you’ll owe an extra .9%. Investments with capital gains, dividends, or interest may also cause you to qualify for a 3.8% Medicare tax on the income generated. Be sure to discuss with an investment advisor and your accountant regarding your individual situation.
11. Have a game plan for the new administration.
As far as tax minimization strategies are concerned, change is sure to be on the horizon with the Trump administration. He’s proposed to repeal certain rules like the estate tax or step-up in cost basis, and is likely to reduce the number of tax brackets. Before jumping to take on new potential strategies, consult your tax and financial advisors before making the leap to avoid potential costs and negative consequences.
12. Have a team of professionals to support you.
Tax laws are confusing and ever-changing. At New Millennium Group, we help you uncover long-term strategies for tax minimization in regard to your social security benefits, retirement, investments, and your overall financial plan. We can then make recommendations for or work in conjunction with your accountant to help you gain confidence in your plan’s ability to minimize your tax burden and maximize your nest egg potential.
Call us today at 801-446-9950!