Thursday, April 14, 2016

Tax Planning for 2016

Federal income taxes are due, and unless you are eligible to make a last-minute 2015 contribution to a deductible IRA (Individual Retirement Arrangement) or HSA (Health Savings Account), there's nothing you can do now to change what happened last year. But there is still plenty of time to make things better for your 2016 return.

If you haven't already started, why not now, while the subject of taxes is fresh on everyone's mind? Here are three suggestions:

First of all, if you got a big refund or owe a shocking tax bill, and you are expecting similar income and deductions this year, consider adjusting your 2016 withholding or estimated tax payments. To determine how much of an adjustment you'll need, divide the overage or shortage by the number of remaining installments and increase or decrease by that amount. If you are an employee, file a new W4 with your payroll department. The form includes a worksheet to help you figure out what to change.

Do you incur expenses for a business, or for volunteer work? If so, make sure you hang onto those receipts and keep them together for easy tallying at tax time next year. And don't forget to log your mileage. If you use your vehicle for both business and charitable purposes, keep separate logs, because the allowable deduction per mile is different.

If you're not already contributing as much as you can afford to retirement accounts—up to any company match, at a minimum—you still have plenty of time left in the year to catch up. Same goes for HSAs, if applicable. Even if you have a workplace retirement account such as a 401k, you can still contribute to an IRA. Whether it can be a Roth or a regular IRA, deductible or nondeductible, will depend on your income and other factors.

You might not be able to avoid paying taxes, but with a little planning and good record-keeping, you can avoid hardship next April 15, as well as the reverse—giving the government too much interest-free cash all year.

What tax planning strategies are you using? I would love to hear your comments.

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