Start a filing system for receipts and other tax documents that accumulate during the year – this is especially important come January when all the tax documents begin hitting your mailbox.
Having a place to systematically drop your tax-related documents will shave hours off of your tax preparation time. Plus, if you use an accountant/tax-preparer, a well thought-out system could save you money on the cost of your return! Further, having a system in place could potentially save you from an inaccurate return that may result in having to amend your filing (with possible penalties to pay if you accidentally under-reported taxes).
Best practice? Look at last year's tax return to see who you should be expecting 2015 tax documents from. Then set up a filing system with folders for receipts, for employer documents (W-2s), and for each of your financial institutions. This will help you identify if you are missing any documents before you begin.
Then, to keep your information safe, scan the documents, burn them to an encrypted file on a disk you can password-protect, and shred the paper documents. You can always re-print them, if you need them.
2. Estimate your 2016 tax bill now
Take the time to see where you stand in 2016. This is especially important if you sold investments during the year, had a significant pay raise, or expect a larger-than-normal bonus. You still have a couple weeks to minimize your tax burden (read on to learn how) should you find that you owe more this year. And, by starting now, you have a couple of months to save if you really need to.
You may want to consider having a tax professional take a look. In most cases, it is worth the cost and the additional peace of mind.
3. Sell loser investments to offset gains
A key year-end strategy is called “loss harvesting” – selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar.
And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.
If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any 2016 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.
4. Donate to charity
The holidays are a great time to write checks to your favorite non-profits. And don't wait for spring cleaning to look around for items to donate or to write checks to your favorite non-profits. Especially if you expect a larger tax hit in 2016 – donate now.
Many taxpayers save hundreds of dollars on their taxes by donating older, little-used items and then deducting them on their taxes. There are many charities that can use them to make someone's holidays more joyful.
Just don't forget to get a receipt! You must have a receipt to back up any contribution, regardless of the amount. (The old rule that you only had to have a receipt to back up contributions of $250 or more is long gone.)
5. Contribute to Retirement Accounts
Contribute to your 401(k) or similar retirement plan by December 31 for it to count for 2016. (Please note: the 31st is a Saturday and your financial institution may be closed!)
If you feel that you may not have contributed as much as you would like to your company's retirement plan throughout the year, you may still have time to correct that. The basic limit on elective deferrals is $17,000 or $24,000 for those 50 and over, or 100% of the employee's compensation, whichever is less.
The elective deferral limit for SIMPLE plans is 100% of compensation or $12,000 in 2015 and 2016. Catch-up contributions may also be allowed if the employee is age 50 or older.
Have an IRA? You have until April 16, 2017, to set up a new IRA or add money to an existing IRA and still have it count for 2016.
6. Recalculate your tax withholding
Most of us love to get money back from the IRS. In fact, close to 70% of taxpayers get a refund (roughly $3,000 each). It's more or less a forced savings plan. However, you make no interest or investment gains on that money, while the IRS hangs onto it.
A better approach is to carefully estimate your taxes, adjust your withholding so you break even on taxes, and then pay the difference to yourself. Your goal should be to neither owe taxes nor to receive a refund.
Worried you'll spend that money, instead of saving it? Easy solutions:
Add the difference to your monthly 401(k) contributions.
Set up a savings account and have your employer direct deposit the net increase to your account. Keep this money separate from your spending accounts (out of sight – out of mind!). At the end of the year, you'll have the equivalent of a tax refund PLUS some interest. Each year, you can then sweep that account into a higher paying CD, into your investment account, or an IRA.
The IRS has a good article on how to handle tax withholding that includes a free calculator.
7. Watch your flexible spending accounts
Flexible spending accounts, also called flex plans or FSAs, are offered as a benefit by many companies. Flex plans let employees contribute part of their pay into a special account which can then be tapped to pay child care or medical bills.
The advantage? Flexible spending accounts are exempt from both income and Social Security taxes. The catch is they have a "use it or lose it" rule. You have to decide at the beginning of the year how much to contribute to the plan and, if you don't use it all by the end of the year, you forfeit the excess.
With year-end approaching, check to see if your employer has adopted the grace period permitted by the IRS, allowing employees to spend 2016 set-aside money as late as March 15, 2017. If not, you can do what employees have always done and make a last-minute trip to the drug store, dentist or optometrist to use up the funds in your account.
BECU has once again teamed up with TurboTax to save members up to $20 . Last year, BECU members saved $242,000 by filing through BECU's Turbo Tax partnership. Through the tax filing period, we'll be providing you with tips and guidance to help you file taxes easily and save money.
This article is meant to be informational, only, and is not intended as giving tax advice. Any decisions regarding taxes should be discussed with a tax specialist.
The investment products sold through LPL Financial are not insured BECU deposits and are not NCUA insured. These products are not obligations of BECU and are not endorsed, recommended or guaranteed by BECU or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.
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