Best Ways to Get a Jump on Your 2017 Income Taxes
As the 2016 tax season winds down, start planning for '17
If you’re one of the 21.5 million Americans who, according to the Internal Revenue Service, wait until mid-April to file their tax returns, you might want to consider getting a jump on your 2017 income taxes.
Rather than just tucking a copy of your 2016 taxes into a filing cabinet and forgetting about it, you can use that return as a roadmap for future planning, says Brent Lipschultz, a partner in the private company services, high-net-worth individuals practice at PricewaterhouseCoopers. “Every line tells a story and that needs to be looked at closely, especially with the possibility of tax reform,” he says.
Here are six ways to prepare now for your 2017 taxes:
1. Pay attention to possible changes in the tax code. There’s been a lot of talk about tax reform and simplification, including speculation that the Trump administration will condense the seven income tax brackets down to three: 12 percent, 25 percent and 33 percent. The repeal of itemized deductions and elimination of the estate tax are also being discussed, says Rohit Kumar, principal and co-leader of Washington national tax services practice at PwC.
Yet, it’s unclear if such sweeping changes will pass Congress. So don’t let potential tax reforms prevent you from beginning to prepare for your 2017 taxes. “Tax reform is discussed every year,” says Carla Dearing, CEO of the online financial wellness firm, Sum180. “When it does happen, it’s rarely so transformative that your tax prep changes significantly from the year before.”
2. Combine your 2016 records with new ones for 2017. Make a master list of what you gathered for your 2016 taxes and, as your 2017 tax-related documents arrive throughout the year, attach them to it.
“Turning tax prep into a routine that you replicate yearly and implement year-long will eliminate the anxiety of having to re-learn something you only think of once a year,” Dearing says.
3. Find a tax organization system that works for you. That will save you time when you need to pull things together to complete your 2017 return. Be sure to keep receipts from energy-saving appliances, work-related subscriptions, office supplies, educational courses for work and charitable contributions, says Brian Ashcraft, director of compliance at Liberty Tax Service. If your medical expenses in 2017 exceed 10 percent of your adjusted gross income and you are under 65, you may be able to deduct those expenses, Ashcraft says. But if you’re 65 or older, medical expenses need to exceed just 7.5 percent of your adjusted gross income.
Should you want to go digital to organize your taxes, consider an easy-to-use app such as Shoeboxed, which scans and categorizes receipts by amount, vendor and payment method and then files them according to tax category.
If you already use Mint or Expensify to keep track of your spending, you can also track, tag and categorize your expenses using these apps and then export the information into a spreadsheet at the end of the year.
You can also reduce paper by simply taking photos of your receipts with your smartphone and then uploading them to Dropbox or Google Drive. Just be sure your photo is fully legible before tossing your paper receipt, Dearing says.
4. Update your W-4 withholdings. Now’s the time to file a new W-4 with your employer to best match your tax situation for 2017. This is especially true if you plan to get married or divorced this year.
Also, if you received a large tax refund for 2016 or expect to, you might want to think about adjusting your withholding accordingly, says CPA and TurboTax expert Lisa Greene-Lewis. The IRS Withholding Calculator can help you decide how much to adjust your withholdings. Just have your most recent pay stub and your 2016 income tax return handy to figure out the calculation.
5. Increase your retirement contribution. You may be able to reduce your potential tax liability for 2017 by contributing to a 401(k) or a traditional IRA, Greene-Lewis says. While retirement contributions aren’t tax deductible, they let you reduce your taxable income. Any money taken from your salary and put into a 401(k) will lower your taxable income so you pay less in income tax.
For 2017, the maximum 401(k) contribution is $18,000; $24,000 if you’re 50 or older. For 2017, the maximum traditional IRA contribution is $5,500; $6,500 if you are 50 or older.
6. Finally, start a budget. The best time to begin budgeting is right after tax season. That’s because your 2016 return will give you a clear view of your income and expenses, says Josh Zimmelman, owner of Westwood Tax & Consulting of Valley Stream, N.Y.
“If your refund isn’t what you hoped it would be or you owed a big tax bill or you realize you spent way more money than you should have in the last year, then it’s the perfect opportunity to make some changes for this year,” Zimmelman says.
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