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With the beginning of summer just around the corner, chances are that you’re not thinking about your 2017 taxes – but you should be. The beginning of summer is a great time to take stock of your financial picture and make any necessary changes. Why? You have a number of 2017 pay periods under your belt and you’ve had several months to work through any changes from 2016. A quick review now can save hundreds (or thousands) of dollars in taxes later.
Here are seven things you can do right now to save on taxes this year:
1. Review last year’s tax return. It’s tempting to just simply toss your tax return in a pile right after Tax Day. And that’s okay for a few weeks. But before you get too comfortable with your tax return in the filing cabinet, pull it out and take a second look. Check your return for errors: you can always file an amended return if you’ve left something out. If any deductions, such as your charitable deductions, were disallowed because of a lack of documentation, etc., make a mental note to get it right this year. If you owed taxes last year, think about how you can reduce the hit at the end and eliminate any potential penalty; if you were owed taxes last year, consider tweaks to your withholding (keep reading) to get that money back during the year instead of all at one time. Finally, if you’ve had any significant changes in circumstances since last year, you’ll want to consider how that might affect your overall tax picture; such changes would include changes in your personal life (such as marriage, divorce, or a new baby), job situation (including a new or second job, raise, or change in hours), or financial picture (like an inheritance, theft, or loss).
2. Double check your retirement contributions. Making contributions to retirement accounts is an easy way to save for the future and get an immediate tax break since deductions may be deductible or excludable. Think you can’t afford it? Think again. Let’s say you make $50,000 per year. By opting for a 1% contribution rate, you’re moving $500 per year to a tax-deferred account; if your employer offers a match, you’re moving $1,000 per year to a tax-deferred account. That money isn’t subject to tax now which means that at a 25% marginal rate, you’re deferring $125 in tax ($250 if you count the employee match) – plus, it grows tax-free until retirement. While $500 might feel like a big hit to your wallet all at once, if it’s automatically debited each pay period, you likely won’t miss it since it works out to just $42 each month. The more you stash away now – without paying taxes on that money today – the more you’ll have for retirement later.
3. Make sure that you’re taking your proper retirement withdrawals. Most taxpayers are aware that they are subject to a penalty if they withdraw money too early from certain retirement accounts but did you know that you can also get hit with a penalty for withdrawing money too late? By law, you are required to withdraw funds from certain retirement accounts each year after you reach age 70½ (or the year in which you retire if you retire after that age). That amount is referred to as a required minimum distribution (RMD). Failure to make those RMDs can leave you with a penalty come tax time. To avoid the hit, make sure that you’re making those withdrawals on time. The rules can be tricky – different rules apply to inherited or estate retirement accounts, for example – so be sure to consult with your financial advisor if you have questions.
4. Fund or top up your Health Savings Account (HSA) or Flexible Spending Account (FSA). Medical costs feel like they keep going up – and with a recent adjustment to the floor for medical expenses (you must itemize on a Schedule A and your deductible medical expenses are only those that exceed 10% of your adjusted gross income (AGI) to claim), it’s less likely that you can take advantage of the medical expense deduction. To help with those costs, consider funding a savings plan for health care now so that you can sock away money to pay expenses on a pre-tax basis for the rest of the year (the HSA can also roll over to next year). If your employer offers a flexible spending account (FSA), you can put aside pre-tax dollars to be used for qualifying medical expenses, including insurance copays and deductibles. Consider a health savings account (HSA), too, since the payment of qualified medical expenses from your HSA is federal income tax-free and you don’t need to have an employer-sponsored plan. Putting away just $1,000 to help with medical expenses could save the average individual taxpayer $250 in taxes (25% of $1,000). Of course, the more you can put away, the money that you can save, subject to certain limits: those limits are set each year by the IRS and are available here.
5. Make changes to your W-4 or consider changing your withholding. The form W-4 is the form that you complete and give to your employer – not the IRS – so that your employer can figure how much federal income tax to withhold from your pay. You typically fill out a form W-4 when you start a new job or at the beginning of the year. However, you may also want to fill out a new form W-4 when your personal or financial situation changes (see #1). Generally, the more allowances you claim on your W-4, the less federal income tax your employer will withhold from your paycheck (the bigger your take home pay) while the fewer allowances you claim, the more federal income tax your employer will withhold from your paycheck (the smaller your take home pay). You want to get this number right since if you owe too much at tax time, you could be subject to an underpayment penalty.
(For more on making changes to your W-4, check out this prior article.)
6. Review your estimated payments. If you receive payments or other money throughout the year without having any federal income taxes withheld, you should consider making estimated payments. If you are filing as an individual taxpayer, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your federal income tax return. This rule applies not only to the self-employed or occasional freelancers but also to those taxpayers who may receive income from other sources not subject to withholding; these tend to be landlords, S corporation shareholders, partners in a partnership or taxpayers with significant investments. To make estimated payments, you’ll figure your estimated tax; you can use the worksheet on the federal form 1040-ES (downloads as a pdf) to figure your estimated tax. For estimated tax purposes, the year is divided into four payment periods, about once every quarter. Each period has a specific payment due date as determined by IRS (usually April 15, June 15, September 15 and January 15). Watch the dates carefully: if you don’t pay on time, you may be subject to a penalty.
7. Make an appointment to see your tax professional. Believe it or not, not all tax professionals close up shop once Tax Day passes: there is work to be done all year long. That said, many tax professionals have a bit of lull in June and July (things often pick up closer to the date that extended returns are due) which makes it a good time to make an appointment. If you manage a small business or run your own show, you should likely be meeting with your tax professional quarterly – just to make sure that you’re on top of things. Most individual taxpayers who don’t run a business find that a quick check-up once a year works out just fine to make sure that you won’t encounter any nasty surprises at year-end: a tax professional can also help you determine whether you need to make a change in your withholding or pay more (or less) in estimated payments. Don’t assume that hiring a good tax pro will be complicated or expensive. Pricing is important but don’t hire just on cost: ask questions and get a referral from a friend. Another plus? Fees for tax advice are generally deductible.