Ok, so 2016 has come and gone. And even though there isn’t much you can do to reduce your income or accelerate your deductions from 2016, there are still things you can do to reduce your tax bill come April.
Here are just a few of last minute tax tips that you should be thinking about to keep your tax bill down.
Contribute to your retirement accounts
The deadline to contribute to an Individual Retirement Account (IRA) or Roth IRA is April 17, 2017. If you are self-employed, then you may contribute to a SEP IRA, up through the date that you file your corporate tax return. If you receive an extension to file your corporate tax return, then you may wait until October 16, 2017, to make these contributions.
If you are looking to max out your IRA contribution, you must:
1) Not be eligible to participate in a company-sponsored retirement plan, or
2) If you are eligible for a company sponsored plan, then your adjusted gross income must be less than $61,000 if you are single, or $98,000 for a married couple filing jointly.
If you do not qualify for an employer-sponsored plan, but your spouse does, then you may make a fully deductible contribution so long as your combined gross income does not exceed $184,000.
In 2016, the maximum amount you may contribute to your IRA is $5,500 ($6,500 if you are age 50 or older by the end of 2016).
If you are self-employed, a SEP IRA is a great way to reduce your income in a tax-deferred plan. For the 2016 tax year, you may contribute up to 25% of your W-2 income, or $53,000, whichever is less.
Contribute to a Health Savings Account (HSA)
If you have a high-deductible health plan (HDHP), then you may be able to take advantage of maxing out your HSA. The benefit to this is that, unlike an IRA, there is no income limit to fully deduct your contribution.
To qualify as an HDHP, your deductible must be a minimum of $1,300 for an individual plan, or $2,600 for a family plan.
You may contribute up to $3,350 for individual plans, or up to $6,750 if you have a family plan. If you are over age 55, you may contribute an additional $1,000.
You may make these contributions up until April 17, 2017, to take effect for the 2016 tax year.
Make a last-minute estimated tax payment
If you are looking at a big tax bill for 2016, and you failed to withhold enough in estimated tax payments, then you could owe significant underpayment interest and penalties.
This can happen in situations where you didn’t withhold an appropriate amount from your paychecks, or if you had a large realized gain from the sale of stock or real estate.
You will owe an underpayment penalty if you don’t pay at least 100% of your 2015 tax bill or 90% of your 2016 tax bill in estimated payments. If your adjusted gross income was $150,000 or more, then you must pay at least 110% of your 2015 tax bill to avoid an underpayment penalty.
To avoid these penalties, you can make an estimated payment by January 15th. This will only eliminate your penalty for the fourth quarter, so you may still owe an underpayment penalty for the first three-quarters of 2016. You can file Form 2210: Underpayment of Estimated Tax if your extra income occurred after August 31, 2016. This will annualize your extra tax liability and assist you in minimizing any potential penalties.
Start Organizing your tax records
If you haven’t already, now is a great time to start organizing your tax records. The better organized you are, the more you will save on your 2016 tax bill.
This month you will start to receive tax correspondence in the mail. Make sure you prepare a folder labeled “2016 Taxes” to keep all this paperwork organized. If you are the paperless type, you may want to scan all these documents into an online folder using a service such as Evernote.
Start looking through your checking and credit card statements, and make note of any tax-related expenses. Clearly, it is better to do this in real-time as you are reconciling your accounts, but managing this now will make things a lot easier for either you or your tax preparer as you get closer to tax day.
Final Thoughts on Minimizing Your Tax Bill
The bottom line when it comes to minimizing your tax bill is knowing which rules apply to your situation and making sure to make the deadlines. While we don’t do tax returns here at The Hart Law Firm, we have a number of tax professionals we can refer you to with any questions. If you don’t already have an accountant that you work with, give us a call at (919) 460-5422 and we would be happy to provide you with several referrals.