Tax season is upon us, and many taxpayers are focused on filing their 2015 tax returns. However, taxpayers should also be planning out what they can do to reduce their tax bill for the 2016 tax year, too. Click through to see how you can get ahead for next year with these 31 tax-planning issues for 2016.
1. 2016 Tax Planning Begins Now
Most taxpayers do their taxes reactively, said financial advisor Kirk Chisholm of Innovative Advisory Group. Instead, he recommended being proactive with tax planning in 2016.
“In September, you should try to estimate your year-end numbers, and see what can be done to reduce your tax burden for 2016,” he said. “Examples where this could be helpful include year-end tax loss selling, contributing to an IRA or 401k or making legitimate purchases for your business that would be deductions for 2016 rather than 2017.”
2. Business Research Credits Are Permanent
The research credit for businesses has been made permanent, said CPA Jody Padar of New Vision CPA Group in Mt. Prospect, Ill. “For taxable years beginning after Dec. 31, 2015, eligible small businesses are allowed to utilize these research credits to offset both regular and [alternative minimum tax] liabilities, and they can elect to claim a certain amount of their research credit as a payroll tax credit against their Social Security insurance liability rather than their income tax liability,” she said.
This is a big deal, especially for startups that didn’t have tax liabilities to offset with credits. They can now use this credit against FICA taxes, said Padar.
3. Make Your Estimated Tax Payments
If you have a fluctuating income, be sure to update your estimated tax payments so you don’t underpay, said financial blogger and entrepreneur Jim Wang of Wallethacks. “Your income might fluctuate because you started earning freelance income or sold property, such as stock,” he said. “So recalculate your tax liability, and make sure you pay enough to fall into the safe harbor amount for both federal and state taxes.”
4. Max Out Your Company Retirement Plan
Now is the time to arrange to max out your company retirement plan — such as your 401k, 403b or 457, said Chisholm. “For year 2016, the maximum you can contribute has not risen. It still remains at $18,000,” he said. “At minimum, you should contribute up to the max that your employer matches your contributions. This should also lower your taxable income for the year.”
5. New Dates for Partnership Returns
Beginning with tax year 2016, the deadline to file partnership returns has been moved to March 15 from April 15 in previous years. For 2016, this means returns will be due March 15, 2017, with the deadline for extensions moved to Sept. 15, 2017.
“Prior to the date changes, it was hard to get the K1 from pass-through entities in a timely manner, so taxpayers couldn’t file accurate tax returns,” said Padar. “The new dates should help taxpayers who are waiting on K1s from outside entities file timely, accurate tax returns.”
6. New Dates for C-Corporation Returns
“The first deadline is April 17, 2017, for corporations on a calendar year basis, beginning with tax year 2016,” said Padar. “The extended deadline is Oct. 16, 2017, corporations are now permitted a six-month automatic extension.” As with the partnership return change, this will allow C-Corporations more time to have received the information they need from pass-through entities in order to file their tax returns.
7. New Dates for Foreign Bank Account Reports
The new deadline for foreign bank account reports is April 15, 2017, for the 2016 tax year, said Padar. The extended deadline is Oct. 15, 2017.
“This is the first time ever that extensions are available for FBARs,” she said. However, unlike tax returns, these items do not have a next-business-day rule if the deadline falls on a Saturday, Sunday or legal holiday, she added.
8. New Business Equipment Deductions
Small business owners will be able to deduct up to $500,000 of equipment in the year of purchase, thanks to new section 179 deduction rules, said Priyanka Prakash of business financing service Fitbiz Loans. The new section 179 deduction rules were made permanent as part of the tax-extender package passed in late 2015.
“This gives you a big tax savings all in one year, instead of having to depreciate a little bit at a time over many years,” she said. “You will need to complete IRS form 4562 to utilize Section 179.”
9. Bonus Depreciation Deduction Extended
Businesses of all sizes will be able to depreciate 50 percent of the cost of equipment acquired and placed in service during 2015, 2016 and 2017. Bonus depreciation then phases down to 40 percent in 2018, and 30 percent in 2019.
This tax deduction was extended through 2019 as part of the PATH Act at the end of 2015. Even though this was not made permanent via PATH, it does allow businesses to do some planning in terms of purchasing needed equipment.
10. Work Opportunity Tax Credit Extended
This business tax credit was extended through 2019 via the PATH Act for companies that hire certain target groups of employees, such as veterans and individuals who are considered long-term unemployed (out of work for more than 27 weeks). This credit can range as high as $9,600 in the first year and is a win-win if the business is able to hire a top-notch employee and qualify for the credit at the same time.
11. Passports Can Be Revoked for Back Taxes
“If you have unfiled tax returns, or if you owe more than $50,000 to the IRS, the State Department can now revoke your passport,” said attorney Matthew S. Rheingold, Esq., with Denville, N.J.-based law firm Einhorn Harris. “In addition, the State Department now has the authority to refuse to issue a passport to anyone who owes more than $50,000 in delinquent taxes.”
This change comes courtesy of the new Section 7345 of the Internal Revenue Code. “This $50,000 liability includes interest and penalties, and will be adjusted for inflation after 2016,” he added. “If your tax debt has been around for a number of years, it is very common for 50 percent or more of the amount owed to consist of interest and penalties.”
12. New Health Insurance Tracking for Businesses
“The healthcare law has changed, and has now been expanded to include businesses that had 51-99 employees during the prior year,” said tax attorney David Hryck of the firm Reed Smith. This change can create an added expense for the affected businesses.
“With the change in health care law, business owners will also be required to keep track of various data,” said Hryck. However, this record keeping is vital to small businesses as part of their efforts to meet their tax obligations.
“This will include hours worked, benefits offered and the total number of full-time employees,” he said. “These changes will be time-consuming, as business owners will need to accurately track and report the data. If your business hires a large amount of seasonal or part-time employees, you will have to create a system that accurately tracks the data.”
13. Higher Health Care Penalties for Taxpayers
Taxpayers who don’t have healthcare this year will face a larger penalty than in previous years, said Hryck. “Due to changes in the Affordable Care Act, health care is now a tax-related topic,” he said. “For any taxpayer who did not have health coverage in 2015, or did not qualify for an exemption, will be saddled with a higher penalty then that of last year. Ultimately, the penalty will lead to a larger tax bill — or a smaller refund — after you file.”
14. You Can Get a State or Local Sales Tax Deduction
The state and local sales tax deduction provision allows taxpayers to choose whether they take a deduction for their state’s income taxes or sales taxes paid. This was part of the year-end tax-extender package passed by Congress in late 2015.
The taxpayers who will benefit most from this provision are those who live in states with no state income tax, such as Florida and Texas. They can choose whether to deduct a predetermined sales tax amount based on their state of residence, or a specific amount if they have receipts and other verification to support it.
Taxpayers in all states will also be able to deduct the sales tax amounts for major purchases, such as a motor vehicle, boat, airplane, home or a major renovation of their home. They have the option to claim whichever deduction is more advantageous, and this can allow them to plan ahead in terms of grouping major purchases into a given tax year.
15. Educator Expense Deduction Is Permanent
The educator expense deduction in now permanent, thanks to the PATH tax-extender bill. This allows teachers and other K-12 educators a $250 deduction for certain out-of-pocket school-related expenses. While many teachers, especially those in disadvantaged schools, could likely spend more than this, it’s a step in the right direction.
16. Don’t Be Surprised by How Much You Owe
Filers often find themselves owing too much money or more than they expected, said Jeff Haywood, CPA and owner of the blog The CPA Superhero. “To address this issue, they could reduce their taxable income by looking for additional deductions to take — either for their business or personally on their schedule A,” he said. “And they should check to find out if they qualify for any of the available tax credits.”
17. Document All Your Deductions
Another big issue for filers is the dreaded tax audit, Haywood said. “Most audits I have seen — and there have not been many — are now handled through the mail, where the IRS asks for documentation for a deduction,” he said. “Where I have seen these is with deduction amounts that are unusually high. So don’t be afraid to take the deduction, but make sure you keep the documentation to support the deduction.”
18. Keep Good Records of Your Investments
It’s not uncommon for tax fliers to get an IRS notice saying that they owe a large amount of taxes from an unreported sale of stock, said Haywood. Filers might not think they need to report the transaction if they lost money on the sale. However, the gross sale amount does get reported to the IRS, which will then send you a notice that you owe tax on the proceeds without considering your cost — and that could result in a shockingly large bill, he said.
“With the sale of stocks, you report both what you sold the stock for and your cost or basis in the stock, which reduces your taxable amount, maybe to zero or a loss,” he said. “If you get the notice, don’t panic. Simply amend your return, showing both the proceeds and your cost, and likely you won’t owe as much — and maybe won’t owe at all.”
19. Don’t Lose Track of Your Documents
Staying organized is key for all tax documents in general. You might receive documents after filing, or they get lost and are not properly included on your tax return, said Haywood. “To avoid filing an amended return to add the missing information, start making a list of all the income and deductions you received during the year,” he said.
“For my clients, I will compare what they have for the year with what they had the prior year and ask about anything that seems to be missing,” he said. “A tax flier can make a list of what they had last year and use it to make sure they have everything for this year.”
20. Be Aware of Minimum Filing Requirements
“Even if you do not meet the minimum income filing requirements to file a tax return, you should always consider preparing a tax return,” said Monique LeMons, CPA for Tada, a consumer tax service from Intuit. “There are certain credits such as the Earned Income Tax Credit that you may qualify for, depending on your income and dependent situation, that could result in a refund.”
21. Selling or Donating Unwanted Goods
If you have unwanted goods, there are potential tax implications whether you sell or donate those items, so it’s important to know what the IRS requires. “For a charitable donation to have an effect on your tax return, you must have enough deductions to allow you to itemize your deductions,” said LeMons.
“If your itemized deductions are not greater than your standard deductions, then any donations you make to charity will not help in reducing your taxes,” she said. “Alternatively, if you sell an item, the income you receive from the sale is not reportable, unless you received more money than what you paid for it.”
22. You Might Be Eligible for Solar Panel Credits
If you’re considering installing solar panels on your home, there are potential tax incentives, said LeMons. “Residential energy credits allow you to claim 30 percent of the cost of installing solar panels,” she said. “This credit is available for solar panels installed through December 2016.”
23. Determine Your Filing Status
If you’re married, you might automatically think that filing jointly is the most beneficial choice. However, that might not necessarily be the case.
“The best way to determine if you should file ‘married filing joint’ or ‘married filing separate’ is to prepare your return both ways — or ask your preparer to do it for you,” said LeMons. “Generally, it is more beneficial to file ‘married filing joint’ for tax purposes.”
24. Be on the Lookout for Health Care Forms
With the new tax reporting requirements for the Affordable Care Act, you can expect to receive some new forms in the mail. The form 1095s are new for the 2015 tax year, so be sure to watch for them for the 2016 tax year, too.
Andrew Townsend, tax analyst for Cedar Rapids, Iowa-based TaxACT clarified: “Form 1095-A is the Health Insurance Marketplace statement; form 1095-B is a statement from your health insurance company verifying that you and other members of your household have insurance coverage that meets the requirements of the ACA. This is for taxpayers whose insurance comes from a source other than the Marketplace and is new for the 2015 tax year. Form 1095-C is a statement from your employer providing details about your employer-sponsored health insurance benefits.”
Taxpayers might be confused as to what to do with the new forms 1095-B and 1095-C, he said. However, all they need to do is mark a checkbox, and keep the Forms 1095-B and 1095-C for their own records.
25. Be Prepared for Meetings With Your Tax Advisor
“Don’t show up for a meeting with your tax preparer without everything you’ll need, [and] don’t be afraid to ask in advance when you’re setting your appointment,” said Eric Roffer, Esq., a managing licensed tax professional at Tax Defense Network. “Keep in mind that tax season is incredibly busy for accountants and tax professionals alike. You may not get a chance to reschedule.”
26. Include All Income on Your Return
Never consider any income you receive throughout the year as non-taxable, said Roffer. That’s a big mistake. “Keep an accurate record of anything you sell, money you win, money from side work — even valuable property that you find on the street,” said Roffer. “Any discrepancies between what you report to the IRS and what you actually brought home can spell trouble for you down the road.”
27. Verify Tax Information From Your Employer
You might not think to verify the tax documents your employer sends you, but you could miss an important mistake if you don’t. “Don’t forget to double-check all of your tax info with your payroll department,” said Roffer. “More specifically, make sure that you’re withholding the proper tax on each paycheck.”
28. New Expenses Are Allowed for 529 Accounts
As part of the PATH year-end tax extender package, you can now use your money from a 529 plan on new qualified expenses. Computer equipment and related expenses for things such as internet access and software are now eligible for 529 plan distributions. This means you can withdraw money for these expenses with no negative tax impact. These days, these are not luxury items, but essential to a student’s success in college.
29. American Opportunity Tax Credit Is Permanent
The American Opportunity Tax Credit was scheduled to lapse in 2017, but was made permanent as part of the PATH year-end tax extender package. Formerly the Hope Scholarship Credit, it provides an annual tax credit of up to $2,500 per year, per student, for those who paid qualified tuition and related expenses for the first four years of post-secondary education. It phases out starting at $160,000 for married taxpayers, and $80,000 for those who are single.
For taxpayers with kids heading to college who meet the eligibility requirements, this is a great benefit. Remember, a tax credit is generally more beneficial than a tax deduction, as a tax credit is a direct reduction in the amount of tax due.
30. Take Qualified Charitable Distributions From Your IRA
This is a popular provision that was finally made permanent as part of the PATH Act year-end tax extender package. This pertains to those taking their annual required minimum distribution (RMD) from their IRA account and who are over the age of 70½. This provision allows the use of all, or a portion, of the RMD as a charitable donation.
This is called a qualified charitable distribution. This satisfies your RMD, and the way it is accounted for serves to reduce your adjusted gross income for the year. This can have a favorable impact for the following year when it comes to Medicare premiums and other items.
31. Tax Day Is April 18 This Year
This year, you’ll have just a little more time to file. Even though April 15 falls on a Friday in 2016, tax day has been pushed out to Monday April 18. This is because federal holiday Emancipation Day is observed on April 15.
About the Author
Roger is an experienced financial writer and financial advisor who uses his experience to explain complex financial topics in an easy to understand format. Roger contributes to his own popular finance blog, The Chicago Financial Planner where he writes about issues concerning financial planning, investments and retirement plans. His work has been featured on Investopedia, US News & World Report, Yahoo! Finance, Equifax Finance Blog and other sites.