10 Things to Do Now to Lower Your 2016 Tax Bill

THEY ADD UP

If taxes are on the agenda for the new year, the focus is probably on getting 2015 materials together ahead of the April crush. But it also makes sense to start preparing now for the 2016 tax year and plan periodic maintenance check-ins. These tips can help individuals and small-business owners lower their tax burden, avoid audits, and feel a little better about the whole process.

OPTIMIZE WITHHOLDING

Although it's nice to get a big refund after sending in a return, it's even better to optimize tax withholding and get a little more money in every paycheck. The IRS has a withholding calculator taxpayers can use to figure out the right amount of income tax to be withheld from their paychecks.

SAVE RECEIPTS

Job hunting this year? Save all the relevant receipts. There is a deduction for everything from buying résumé paper to traveling for job interviews. This may not amount to a lot, and applies only for people who itemize deductions, but it takes some of the sting out of the search.

GET EDUCATED

People spending time and money pursuing higher education and enrolled in a post-secondary school, such as a two-year or four-year college or vocational program, may be eligible for a Lifetime Learning Credit worth up to $2,000 a year. Spouses or dependents can also qualify by filing as head of household, but in all cases income restrictions apply.

BUY HEALTH INSURANCE

In 2016, the penalty for not having health insurance increases to the greater of 2.5 percent of household income or $695. Although enrolling in a plan may be more expensive, the penalty is worth avoiding for those who can. Individuals and families get a subsidy toward premiums if their annual income is less than 400 percent of the federal poverty level. Use Healthcare.gov to see qualifications based on household size and state of residency.

REPORT LIFE-CHANGING EVENTS

Michael Raanan, a former IRS agent, reminds taxpayers that a major "life event," such as a marriage or the birth of a child, should prompt submission of a new Form W-4 to an employer. New circumstances may affect the amount of income tax withheld from a worker's pay.
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PAY ESTIMATED TAXES ON TIME

Anyone earning money on the side through a freelance job, their own business, or even from interest or rent income should remember to pay estimated federal and (when applicable) state taxes four times a year. Failure to do so can result in costly penalties.

MAINTAIN SEPARATE BUSINESS ACCOUNTS

Anyone starting a business should consider opening separate business credit card, checking, and savings accounts. Using a single account for personal and business expenses can get business owners in trouble during an IRS audit. Keeping finances separate is also good for business -- it provides accurate, real-time information and helps keep an entrepreneur organized and sane all year long.

TRACK MILES

Small-business owners should track how far and when they drive for any work, medical, volunteer, or nonprofit activity. Even short trips to the local drugstore to pick up a prescription or to a local charity to drop off a donation can add up to a decent tax deduction.

RECORD OTHER BUSINESS EXPENSES

In addition to keeping an accurate mileage log, business owners should keep expense reports for all other kinds of business-related travel as well as receipts for business-related meals (note dining partners' names and the purpose of the meeting) to write off on their taxes.

DOCUMENT EVERYTHING

Make notes and keep documentation for everything. It is important to have proof of events and expenses if needed, and sometimes it can be hard to remember specifics. This is particularly important for events that occur early in the year, which may be long forgotten when it comes time to file the 2016 return next year.