Your Future Self Will Thank You
You might be feeling the pressure of the looming tax deadline as you scramble to find receipts and think back to every donation you made over the last year. And then soon enough, the process will start over again, raised blood pressure and all.
But it doesn’t have to be this way. Save yourself from feeling frazzled when it comes time to file your 2016 taxes by taking some easy steps throughout the year. Here are five ways you can start preparing for next year right now.
If most of your documents are on paper, buy a large accordion folder (or just repurpose an old shoebox) and start putting documents into it as they arrive, Jo Anna M. Fellon, senior tax manager at Friedman LLP, says. Here’s what you need to save:
Property tax bills
Copies of state and local estimated tax payments
Receipts from medical expenses (including anything paid for with a health savings account card), child care, tuition expenses, employee business expenses like unreimbursed client lunches, coffees, and travel
Records of charitable donations
If you’re constantly losing paper receipts, you can scan them with mobile apps like CamScanner, Genuis Scan, and TinyScan. To keep them all in one place, create a folder in your email for 2016 tax documents and send scanned receipts to yourself. (Pro tip: If you use Outlook or Gmail, you can create a rule that sends anything with the subject line “2016 taxes” into that folder.)
Adjust Your Withholdings
Once you finish your 2015 taxes, use your completed return to help you make better decisions for the next time around. For instance, if you under-withheld taxes in 2015, you should adjust your 2016 withholdings to avoid possible penalties next year, Fellon says.
Similarly, if you receive a large refund, you’ll want to up your exemptions for next year, says Christine M. Searle, certified internal auditor and owner of Searle Business Solutions, LLC. While a big refund sounds like a bonus, both Searle and Fellon agree your goal should be to use the money you earn throughout the year rather than getting a large refund the following year. Think about it this way: That money could have been hanging out in a savings account, earning you interest all year.
If you’re struggling to figure out how much to withhold, you can use the IRS Withholding Calculator to plan for next year. You’ll need to have your most recent pay stub and income tax return handy. Talk to your company’s HR staffers once you know what you want to adjust.
Plan for Big Life Changes
Is your life on track to change significantly in the next year? If so, you’ll need to factor those changes into your 2016 taxes, starting now.
Having a Baby or Getting Married
You may need to adjust your withholdings, because married couples filing jointly qualify for a lower tax rate. And having a baby allows you to claim another dependent, which impacts your withholdings.
Buying, Refinancing, or Selling a House
You might need to pay taxes on the profit you made from selling your house, or you might qualify for homeowner’s tax credit or additional deductions. If you sold or bought any real estate this year, make sure your HUD-1 form goes into that tax file, Fellon says. After the sale of real estate, Fellon recommends you speak with an accountant. You could get slapped with extra taxes next year, which you won’t want to come as a surprise. (For example, if you sold your house, made more than $500,000, and you file taxes jointly, you may need to pay taxes on that gain.)
Going to School
If you or your children are enrolled in college, you may qualify for the Hope Scholarship Tax Credit or the American Opportunity Tax Credit, which both require you to keep track of expenses, tuition, books, and any other supplies. (The best way to figure out whether you’re eligible for either benefit is to use this tool from the IRS.) Searle recommends double-checking any receipts from educational institutions to ensure they match up with your own records, because discrepancies are common due to the timing of payments. And if you’re using a 529 plan to pay for college, you’ll need to keep track of how much money you’re taking out of the account, Fellon says. The money you withdraw from the account needs to be equal to or less than the education expenses you incurred for that tax year in order to be tax free.
Check In All Year
Set calendar alerts for once each quarter to check that your income and withholdings are still in line with each other, Fellon says. For instance, if you get a big bonus, you should take a look at your withholdings and understand how that bonus will be taxed, Fellon says: “The rates can vary depending on if your bonus is considered separate from or combined with your overall salary.”
If you want to lower your tax bill for next year, consider raising your retirement contributions. Check in once every few months to see if you’re contributing as much as you can — any money taken from your salary and put into a 401(k) will lower your taxable income. You could end up paying a smaller tax bill and setting yourself up for a better retirement.
Look at the Big Picture
If you’re like most people, you talk to your tax advisor only once a year, and you aren’t sure who’s even managing your retirement funds. Fellon recommends staying in touch with your tax advisor and your retirement account advisor throughout the year. If you have an employer-sponsored 401(k) plan, then you have a retirement account advisor, Fellon says. Ask HR for that person’s contact information.
Being aware of the many elements of your financial picture will help you to make better decisions throughout the year. Any time you have a question, Fellon says, you should call or email one of your advisors. “It’s important to have a holistic view of your gains and losses,” she says. That way you won’t be hit with surprises or left scrambling when the next tax season rolls around.