Editor's Note: This article was originally published in March 2015 and has been updated to include new tips for tax filing year 2016.
“In this world nothing can be said to be certain, except death and taxes.”
It’s February, which means tax time is just around the corner, and you’ve probably seen lots of articles quoting Benjamin Franklin’s historic quip, but taxes don’t have to be as bad as all that. Whether you’ve already started your taxes, outsourced the entire process to a tax professional, or are waiting until the last minute, small things make a big difference when it comes time to do your filing.
These seven strategic tax tips have been selected to help you get the most possible out of your tax filing. So, instead of dreading doing your taxes, maybe this is the year where some extra research could help you save a bit more. Or perhaps you’ll set a goal to finish your taxes earlier than you’ve ever finished them before. So, grab the tax bulls by the horns! And use these seven strategic tips to potentially make your life easier.
Tip #1: Review Last Year’s Documents First
Review all of your tax documents from last year to make sure that everything has been reported correctly. Check your W-2s, 1099s, and other income documents to confirm that there aren’t any obvious errors in the way your income has been reported. If there are problems, you’ll need to contact the company/issuer of the documents.
Tip #2: Consider Requirements for Your Investments
When it comes to reporting your investment earnings, organization is key. The IRS requires that you report your interest and dividend categories separately. This information will be easier to find if you have your earnings statements available from all of your investment accounts. Yearly statements may contain all the information you need, but it doesn’t hurt to keep your monthly or quarterly statements in a file folder just in case you need more detailed information while doing your filing.
Tip #3: Reduce Your Taxable Income with a Traditional IRA
If your 2016 Modified Adjusted Gross Income (MAGI) is $98,000 or less (joint) or $61,000 (single), you may be able to fully deduct contributions to a Traditional IRA. A higher income than that may just mean partial deductions, so check with a tax professional. Many taxpayers can make contributions to a Traditional IRA up until the time you file (due date April 18, 2017). The tax-deductible contribution limit for the 2016 tax year is $5,500. For those who are age 50 and over, the limit is $6,500.
Tip #4: Don’t Forget Charitable Donations
Charitable donations are often an effective way to reduce your taxable income for a given tax year, with the added benefit of helping those in need. According to the IRS, charitable contributions are only tax deductible if you itemize the deductions.1 Charitable contributions must be made to qualified organizations in order to receive a deduction on your taxes (if you want to check if the organization qualifies as an “exempt organization,” you can check here: https://www.irs.gov/charities-non-profits/exempt-organizations-select-check). To deduct your charitable contribution, you’ll need to provide a bank record or written communication from the charitable organization that includes the name of the organization, the amount, and the date of the contribution. Don’t forget about property you may have donated as well – that may count as well.
Tip #5: Include Medical Expenses
Another important tax deduction is medical expenses, but you’ve got to have the documentation to back up your claims. Your unreimbursed medical deductions will need to total more than 10% of your adjusted annual income, and according to the IRS those aged 65 or older are exempt from the increase (meaning the expenses need to total a lesser 7.5% of adjusted annual income).
There are many commonly-overlooked medical deductions you can take, but you’ll need to keep track of your records. With proper records, you may be able to claim the following:1
- Travel expenses to and from medical appointments and treatments
- Insurance payments from income that has already been taxed
- Medical treatments that aren’t covered by your insurance, such as contact lenses, false teeth, and hearing aids
- Laser vision corrective surgery
- Medically necessary items prescribed by your physician such as adding a humidifier to your home’s HVAC system
- Costs associated with controlled substance rehabilitation treatments
As with charitable donations, keep track of these records throughout the year, either in a paper folder or an electronic file. When it’s time to file your taxes, you’ll have everything you need in one place.
Tip #6: Track Your College Education Expenses
Work with a tax professional to deduct qualified expenses when it comes to spending on higher education for your family members, and make sure that any distributions from your 529 college savings plans match-up with the expenses incurred in the same calendar year. It could make sense to keep an Excel spreadsheet or some other running tally on all college-related expenses, from tuition to books to room and board.
Tip # 7: File Early to Avoid Fraudsters
Fraudsters are sometimes known to file fake returns in a person’s name…before that person has the chance to. This way, they can collect the refund while it’s still available. According to Fidelity Investments, one of the best ways to safeguard against this type of fraud is by filing your returns as early as possible. If you file a legitimate return before a fraudster tries to file one in your name, the fraudulent return gets rejected.
Above All, Ask for Help!
While the Wealth Managers here at WrapManager are not tax professionals, we can act as a sounding board to give some ideas on what you may want to bring up with your CPA or a tax professional. For those who are already clients, we will work with you to provide all of the documentation you need as it relates to your investment accounts. If you want to run some questions by us or have questions about these strategic tax planning tips, please do not hesitate to give us a call at 1-800-541-7774 or start a conversation over email at wealth@wrapmanager.com.
Sources:
1. IRS: Charitable Contributions / Medical Expenses
The information presented by WrapManager, Inc. is general information only and does not represent tax or legal advice, either expressed or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. WrapManager, Inc. does not advise on any income tax requirements or issues.
