The thought of income tax filing season fills most people with anxiety, if not utter dread. And even though the stress of filing your return has (hopefully) passed, it’s important that you don’t rest on your laurels. As any tax accountant will tell you, proper planning for your annual tax return is a year-round endeavor.
Here are five things you can do now to put yourself in a better position for next tax season.
1. Know how your relationships affect your tax return
This step may seem like a no-brainer. If you’re married, you file a joint return; if you’re single, you file a single return. However, it’s important to recognize that your relationships can have a significant impact on your tax bill. Like most people, you’re probably familiar with the basic filing statuses — however, lesser-known statuses, such as head of household or qualifying widower, also have unique benefits that may be available to you. Make sure you have a complete understanding of which filing status best applies to your situation so you can benefit from the most favorable tax treatment.
It’s well-known that taxpayers can claim their minor children as dependents and receive a personal exemption for each child, which reduces their tax bill. However, there may be other individuals in your “household” who can also qualify as dependents, such as elderly parents or adult children who are full-time students. Conversely, if one of your children has recently set out on their own, you’ll have to discuss with them who will claim the personal exemption on their behalf moving forward.
2. Keep track of your donations to charity
Many people donate to different charitable organizations here and there, whether it’s a weekly cash donation to their local church or a one-time gift to a youth organization. These amounts can add up quickly, so you need to have a method for keeping track of them. Some people keep an envelope designated for receipts from charitable donations; others use a special folder in their email inbox or designate payments to charities as donations in their online banking software. Whichever method you choose to pursue, make sure you know where this important information is housed well before Tax Day.
3. Make a list of your accounts
For the most part, taxpayers have the same types of income from the same places each year. However, many of us still scramble to organize and double-check our paperwork before sitting down with our tax-filing software or passing off documentation to our tax preparers. Next year, avoid the chaos by reviewing your 2016 return and recording the bank accounts, investment accounts and employers from which you received statements in 2016. Throughout the year, make sure this list is updated as you add or close accounts. Doing the extra legwork now will save you the time and headache of sorting through your accounts next year, when changes may not be fresh in your mind.
4. Determine whether you should itemize your return next year
Take a quick look at your 2016 return: is the total amount of your itemized deductions close to the standard deduction? This amount is $12,600 for people who file a joint return and $6,300 for single filers. If your itemized deduction is only slightly higher than the standard deduction, you may be able to pay less tax by alternating the years in which you claim the itemized deduction.
The key to this strategy is that you should pay property taxes for the prior year and the current year in the same year. For example, this year, you may choose to pay your taxes due for 2017, and then prepay your taxes that would come due for 2018 in late December. This allows you to take the deduction for property taxes twice in the same year and can significantly increase the size of your deduction.
5. Stay ahead of any significant life changes
A lot can change in a year — and some of those developments may have an impact on your taxes.
Are you turning 70 this year? You may need to start taking distributions from your individual retirement account (IRA), if you have one, which will increase your taxable income for the year.
Is your child headed off to college? There are numerous tax incentives linked to college education, including the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit and the adjustment for tuition and fees.
Are you planning on selling some property? You must report those sales on your tax return. If you’re selling your personal residence, you may qualify to partially or completely exclude the gain on the sale of your home from your taxable income.
As the old adage goes, proper preparation prevents poor performance. Being proactive about your tax situation can save you time, headache and money once April comes around again next year.