With 2016 over, you may feel like it’s too late to do anything that will impact how you file taxes this coming April.
While many deadlines that would impact your tax return for 2016 have passed, there are still a few ways you can take action to influence your situation from the previous tax year.
Here are 5 things to keep in mind before you begin filing taxes for 2016.
1. Make estimated tax payments
If you expect to owe more than $1,000 after filing taxes, the Internal Revenue Service (IRS) might expect you to make an estimated payment. But, most W-2 employees don’t need to worry about this since their employer withholds taxes from their paycheck each pay period.
However, if you’re self-employed or make income outside your W-2 earnings, you could be obligated to send in an estimated payment. You can use Form 1040-EZ from the IRS to calculate what you might owe.
Keep in mind that the deadline for your last quarterly estimated tax payment for the 2016 tax year is January 16, 2017. And, failing to make a payment if you do owe money could result in a penalty. So don’t wait until April to get started on filing taxes!
2. Max out retirement accounts before filing taxes
Although 401(k) contributions must be made by the end of the tax year, you can keep funding certain retirement accounts for the 2016 year past December 31, 2016.
Therefore, if you haven’t maxed out your IRA, consider fully funding it before your 2016 tax return is due this April. Not only do you save and invest for your future, but you could also reduce your taxable income.
Retirement accounts like traditional, SEP, and SIMPLE IRAs are also tax-deferred. This means your contributions to these accounts lower your adjusted gross income, potentially putting you in a lower tax bracket as well.
Just make sure you are checking off the right tax year when submitting contributions. And remember that you have up to a specific deadline to file taxes to contribute to a variety of IRAs.
3. File for an extension
Not everyone will need one, but you can file for an extension on your tax return for 2016. This gives you additional months — until October 2017 — to file taxes and pay what you owe.
Extensions are most helpful for people with complicated tax or financial situations, along with business owners. However, you’re not required to provide a reason when you ask. You can use IRS Form 4868 to request the extension.
4. Get organized now
April may still seem like a long way away. You have plenty of time to prepare to file taxes. Right?
Yet, disorganization can cost you. Especially if you wait until the last second to file and then realize you’re missing important documents or forms. That’s a literal cost, too.
The IRS can charge you a failure-to-file penalty if you don’t submit your 2016 tax return by the April 2017 deadline. A failure-to-pay penalty could also apply if you owed taxes but didn’t pay by that deadline, either.
The penalties range from half a percent to about five percent right off the bat. Penalties increase each month you don’t file taxes or pay what you owe until they max out at 25 percent of your unpaid taxes.
Act now to get everything you need on hand, so you don’t run into trouble (and fines) later down the road. Here are some of the documents you should make sure you have on hand:
- W-2s from employers
- 1099s from any miscellaneous income you earned (through side hustles, interest, dividends on investments, etc.)
- Form 1098 if you own a home and paid mortgage interest
- Receipts, invoices, and any other paperwork that provides proof of charitable donations and other deductions or credits you want to claim
5. Research deductions and credits you can claim
It may be too late to take a specific action to make you eligible for a deduction or tax credit.
However, you do want to make sure you revisit your financial activity from 2016 so you know what you can claim on your tax return.
For example, did you pay student loan interest? If your answer is yes, then you could deduct that from your taxable income.
But if you didn’t know that was an option in the first place, then you miss the opportunity to claim it. Or, fail to gather the right documentation to prove you paid the interest in time to file.
Here’s a quick list of common deductions and credits you might be able to claim when filing taxes this year:
- Student Loan Interest Deduction
- HSA Contribution Deduction
- Mortgage Interest Deduction
- American Opportunity Credit (or the Lifetime Learning Credit)
- Saver’s Credit
Again, make sure you gather supporting documents if you feel you qualify for these deductions or credits. You’ll need to submit them with your return.
2016 may be over, but that doesn’t mean you should sit back and wait until April 2017 rolls around to worry about filing taxes. See what you can do right now to improve your situation and make the most of your return.