We are already a couple of months into 2017, which means tax season is upon us. Do you feel confident about what lies ahead for your 2016 tax return? If you are like many people, you would rather put your head in the sand than think about preparing and completing your tax return. You might reason that there isn’t anything you can do to change it, so you might as well not waste any time thinking about it.
While it is true that many tax planning options for 2016 have expired, there are still some things you can do to help your bottom line. Additionally, now is a great time to start thinking about your taxes for the 2017 tax season. Whatever you do, try to not get overwhelmed and take it one step at a time. A little preparation goes a long way.
THE EARLY BIRD GETS THE WORM
There are many benefits to filing your taxes as early as possible:
- Your chances of identity theft increase the later you file
- Gives you time to track down missing documents
- Allows your tax preparer time to give you more attention before they get busy
- Early filers get their refunds much faster (even faster for those who e-file)
- See a snapshot of your tax situation and reveal tax savings strategies
- Peace of mind. Who wants to deal with that anxiety until April (or later if you extend your return)?
Many retirement savings contributions made by the tax filing deadline (April 17, 2017, this year) can help reduce your 2016 taxable income. If you prepare your taxes early, you can see how close your taxable income is to threshold limits for certain deductions. If you are close to one, a small retirement contribution not only increases your chances of not outliving your retirement savings, but also could reduce your tax bill significantly. Even if you aren’t close to a deduction income limit, it will still reduce your taxable income as long as you contribute to an eligible retirement account like a deductible individual retirement account (IRA).
Do you take one of your children to jobs with you? Maybe you pay them a wage for their time. Your child could put their earned income into a Roth IRA. Roth IRA contributions grow tax-free, and since you contribute to them with funds that were already taxed, they can be withdrawn at retirement tax free. This won’t reduce your 2016 taxable income, but compound interest is very powerful, especially for a child in their mid-20s or younger.
HOW SHOULD YOU PREPARE?
If you already use accounting software like QuickBooks, then you are off to a good start. Ensuring that all of your bank and credit card statements have been reconciled in your software is a great way to make sure you have accounted for all of your income and expenses. Of course this will not capture any expenses you may have paid in cash, so do your best to separate any register receipts that were paid in cash and tell your tax preparer to include those as well.
As you go through your bank and credit card statements, make a list of any payments you received that might result in you receiving a 1099 or W-2. If you do work for a company and earn more than $600, you should receive a 1099 and must include that income on your tax return. If you make that checklist early, you can start marking them off as you receive them in the mail. That way you know which ones are missing and can start asking for them in early February. Companies have a deadline of Jan. 31 to postmark your 1099s and W-2s.
Keep in mind that your federal return is not the only form due soon. Of course you have the state you live in (unless your state has no income tax), but you also may owe taxes to your municipality. There also will be sales and payroll forms due if applicable to your business.
If you haven’t been using accounting software or still feel overwhelmed about your taxes, it might be helpful to contact a trusted accountant as soon as possible. Call them and ask if they have a tax checklist that will help you get organized and think of any deductions you might not know about. They will likely give this to you for free which gives you the opportunity to get a feel for them to see if you want to hire them to file your tax return. Another option is downloading one from the internet. Simply search for “2016 tax return checklist” or look on irs.gov. The IRS website is surprisingly easy to use.
Remember that now is a great time to be thinking of your tax situation for 2017. If you aren’t currently using accounting software, then now is a great time to get started. Plus, getting started with 2017 can help you think of things you might have forgotten that apply to your 2016 tax return.
QuickBooks gives you the ability to assign a tax line to each item. Over time, you could get dangerously close to being able to complete your tax return.
As you get better at analyzing your financial results, you can do more tax planning that could save you big over the years. This could include estimating your tax payments and avoiding giving the government an interest-free loan by receiving a large tax refund each year. This will also help you with tax saving strategies like timing when to purchase new business equipment.
Here are some final thoughts to help guide you:
- www.irs.gov – contains a wealth of information. The site has a section for all types of businesses, small and large.
- Remember that extending your tax return doesn’t extend the time you have to pay. If you don’t pay taxes owed, you will pay a penalty. This doesn’t apply if you are due a refund.
- The IRS will never call or email you asking for personal information. When in doubt, hang up and contact them via their contact information on www.irs.gov.
Best wishes for a great 2017!
Bree Urech-Boyle is Chief Financial Officer at the National Wood Flooring Association in St. Louis. She can be reached at firstname.lastname@example.org.