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.