Lakeside Financial Planning – Advisor Insights

Take Control Over Your Taxes Before It’s Too Late

MONEY TALKS – Congratulations, you finally finished your 2016 tax return (with 4 days to spare). If you, like most Americans, just sighed in relief and thought to yourself “thank goodness I don’t have to worry about my taxes for another eight months”; unfortunately, you couldn’t be further from the truth. This common line of thinking often gets taxpayers in trouble because waiting until January of 2018 leaves you with limited tax planning options and very little control over the size of the check you write, when filing your tax return. To get a jump start on the tax year, here are a few planning strategies you should be thinking about now so you can take control over your taxes before it’s too late.

Adjust Tax Withholdings – The majority of salaried employees receive a Form W-2 (Wage and Tax Statement) in early February showing their wages earned (Box 1) along with their Federal income tax withheld (Box 2). What you may not know is the amount withheld is generally dependent on two factors; your taxable wages and how you filled out Form W-4 (Employee’s Withholding Allowance Certificate) on your first day of work. If you owed money with your 2016 tax return, then you should consider adjusting your withholding so more tax is withheld. Rather than messing around with the number of allowances you are claiming, which confuses most people, the easiest way to increase the amount you want withheld from each paycheck is to simply write the dollar amount on Line 6. Conversely, if you received a large refund (over $1,000) then too much is being withheld from your paychecks. While it’s nice getting money back in April, if you are receiving a refund year over year then you are essentially giving the government an interest free loan. Lowering the amount of allowances you claim will reduce the amount withheld from each paycheck, giving you more money to invest throughout the year.

Manage Retirement Contributions – The easiest way to reduce your taxable income is by contributing to a qualified retirement plan such as a 401(k). The employee contribution limits for a 401(k) are $18,000 for those under 50 years old and $24,000 for those north of the border. Ideally, from a tax standpoint, you should be maxing out your contributions to lower the amount of income subject to taxation. If you aren’t sure how much you contributed last year, take a look in Box 12 of your W-2. You should see the letter D followed by a number, which was your 2016 401(k) contributions. If that number is below your respective contribution limit, increase your contributions to maximize your tax savings.

Spring Clean – Donating clothing and household items to a qualified charity is a great way to save on taxes because the fair market value of your contributions is tax deductible. Household items include furniture and furnishings, electronics, appliances, linens, and other similar items. Keep in mind that you can’t take a deduction for clothing or household items unless they are in good used condition or better. One area often overlooked is recordkeeping. Remember that the burden of proof is always on the taxpayer, not the IRS. If you gave property, you should keep a receipt or written statement from the organization you gave the property to, or a reliable written record, that shows the organization’s name and address, the date and location of the gift, and a description of the property.

As with most areas of life, proper planning is crucial to achieving your goals. Tax planning is a fundamental component of any good financial plan. The key take away here should be that it’s much more effective implementing tax strategies now rather than waiting until the next year’s W-2 shows up in the mail.

Seven Deadly Sins to Avoid During Tax Season

MONEY TALKS – Anyone who has poked their head outside the last two weeks couldn’t help but notice that winter is fading and spring is steadily approaching. While the melting snow and chirping birds may give some solace that the dark and cold days are behind us, it’s also a reminder that tax season is quickly approaching. Each year millions of Americans make simple mistakes hastily trying to get their tax returns filed before the deadline. Before you file this year’s return, be sure to check this list to make sure you are not making one of the seven deadly tax sins.

1. Missing the Deadline – If you procrastinate getting your tax documents together, there is a good chance you could miss the April 15th filing deadline. Missing the deadline itself is not a huge issue unless you fail to notify the IRS in advance. Be sure to file a Form 4868 extension request if you are going to be late filing your taxes, which will give you an automatic six-month extension to file your return. Keep in mind that the extension is only on the filing of the tax return, not the payment due. If you think you may have a balance due with your tax return, be sure to make an estimated payment with your 4868 to avoid any penalties and interest.

 2. Filing the Wrong Tax Forms – Opting to use the Form 1040EZ because, as the name suggests, it’s easy to file could be a costly mistake. The 1040EZ forces you to take the standard deduction and does not allow you to itemize your deductions. Opting to file Form 1040 instead will afford you the option of choosing to itemize your deductions or take the standard deduction, whichever is higher. If you had significant medical or dental expenses, live in a state that taxes your income, paid real estate taxes or mortgage interest, donated to charity, or had a home office, then you should seriously consider filing a 1040 to maximize your deductions.

3. Spelling Your Name Wrong – Believe it or not one of the more common mistakes you can make on your tax return is to misspell your name. Whether it was a typo, you didn’t use your full legal name, or you recently married or divorced and haven’t registered a name change with the Social Security Administration, you need to make sure the name listed on your tax return matches your Social Security Card. Making a simple error could lead to a rejected return. Even if your return is accepted your refund could be delayed if the name on the check doesn’t match that on your bank account.

4. Wrong or Missing Social Security Number – Forgetting to include or entering the wrong Social Security number for you, your spouse, or your dependents is one of the most common errors you can make when filing your tax return. The IRS uses Social Security numbers to cross-reference information it receives from your employer and other financial institutions. If unable to do so, the IRS could reject your tax return. Avoid this simple mistake by verifying each Social Security number on your tax return matches the corresponding Social Security card(s).

5. Selecting the Wrong Filing Status – Filing under the wrong status is commonly made by single parents whom mistakenly file as Single instead of choosing Head of Household. If you have a qualifying dependent living with you and provided more than half the cost of maintaining the home then you may be eligible to file as Head of Household, which will give you an extra $3,000 in deductions. Another common mistake is for a recent widow or widower to file as Single. Widows or Widowers can file as Married Filing Jointly (MFJ) in the year of death. Furthermore, you may be able to file as a Qualifying Widow(er) for two more years if you have a dependent child in the house.

 6. Forgetting to Sign and Date Your Return – Technically speaking an unsigned return is incomplete in the eyes of the IRS. This means that your return may not be accepted and could be considered late, leaving you liable for penalties and interest. Be sure to sign and date your return! Keep in mind that if you are MFJ, then your spouse has to sign as well. Remember, if you are electronically filing you are not exempt for this requirement. If you are e-filing you need to sign the return using an electronic Personal Identification Number (PIN).

 7. Making Math Errors – The most common error year over year on tax returns is mathematical mistakes. In fact, every year the IRS catches millions of math errors as a result of poor arithmetic and/or inaccurate transposition. Using a tax software program will dramatically reduce the likelihood of a math error. That being said, tax software does not guarantee your return will be mistake free. It’s imperative that you double check the numbers you input because the software is not smart enough to know whether or not you are entering the correct figures. Filing an inaccurate return due to a math error could lead to big trouble with the IRS and less money in your pocket.