11 Things to Do Now to Lower Next Year's Tax Bill
For most taxpayers, the immediate focus in the new year is probably on getting 2016 materials together ahead of the April rush. But it also makes sense to start preparing now for the 2017 tax year. These tips can help individuals and small-business owners lower their tax burden next year, avoid audits, and feel a little better about the whole process.
Related: Strange But True Tax Laws From All 50 States
Although it's nice to get a big refund after sending in a tax return, it's even better to optimize tax withholding and get a little more money in every paycheck. The Internal Revenue Service has a withholding calculator taxpayers can use to figure out the right amount of income tax to be withheld from their paychecks.
Taxpayers might want to increase their retirement contribution rate during 2017, helping grow a retirement fund while lowering their tax bill. Investments in tax-advantaged accounts -- such as a traditional IRA, 401(k), and 403(b) -- grow on a tax-deferred basis and can be withdrawn without penalty starting at age 59 and a half.
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.
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. Taxpayers may be able to claim the credit if their spouse or dependent has eligible higher education expenses.
For the 2017 tax year, the penalty for not having health insurance remains the greater of 2.5 percent of household income (up to the annual national average premium for a bronze plan) or $695 per adult and $347.50 per child (up to $2,085 total). 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. Consult Healthcare.gov to see qualifications based on household size and state of residency.
Anyone earning money on the side through a freelance job, their own business, or even from interest or rental 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 for those who expect to owe at least $1,000 in taxes.
Anyone starting a business should consider opening separate business credit card, checking, and savings accounts. Keeping finances separate could make it easier identify and organize business expenses when filing a tax return, and helps provide entrepreneurs with real-time information throughout the year.
Taxpayers who itemize deductions should track how far and when they drive for 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. Self-employed individuals can write off many work-related trips against their business income.
In addition to keeping an accurate mileage log, business owners should keep expense reports for all other kinds of business-related purchases, travel, and meals (note dining partners' names and the purpose of the meeting). A shoebox full of paper receipts could be a pain later, so make this the year to get organized, perhaps with the help of an app.
Make notes and keep documentation for everything. It's 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 2017 returns next year.