Tax season is almost upon us and it is important that you have all the information you need to file your 2016 tax returns. Below you can find great tips to help you understand the filing process. If you have any specific questions related to your filing situation, it is important to consult with a tax professional.
1. Maximize retirement plan contributions
If your employer offers a 401(k) or other type of deferred pension plan, make every effort to contribute the maximum amount allowable — especially if your employer matches your contribution. Otherwise you are leaving money on the table that could benefit you in your retirement. Think of the employer match as an immediate 100 percent return on your money. Even if there is no match, all of the funds are tax-deferred and grow tax-free.
If your employer does not offer a retirement plan, then consider making a contribution to a traditional individual retirement account or a Roth IRA. The former potentially offers a tax deduction for the year the contribution is made, but both offer tax-deferred gains.
2. Adjust your withholding
Check your year-to-date withholding and consider changing the taxes withheld if you are expecting a large refund.
This is especially important if you are claiming the earned income tax credit, or EITC, or the additional child tax credit. Why? The IRS is now required by law to hold all refunds on those returns until Feb. 15. The new law was put into place to allow the agency additional time to detect and prevent tax fraud.
IRS Commissioner John Koskinen said in a statement: “It’s a personal choice if you want to have extra money withheld to get a bigger tax refund, but you have options available if you prefer to have a smaller refund next year and more take-home money now.” You will need to complete Form W-4, Employee’s Withholding Allowance Certificate, to adjust the amount of taxes withheld and submit it to your employer.
3. Protect your identity
Speaking of tax fraud, if you received an Identity Protection PIN, or IP PIN, in the past, then you must provide this number on your tax return not only this year but on all future tax returns. An IP PIN is a six-digit number assigned to eligible taxpayers that helps prevent fraudulent returns from being filed under your Social Security number. Remember, the IP PIN is your friend in getting the IRS to accept your tax return. However, this is no ordinary IP PIN, as it changes every year. You read that correctly: every year! If you do not receive the notification in the mail, you will need to go to the IRS website to retrieve it.
4. Get what’s yours
According to the IRS, one out of every five workers fails to claim the very valuable earned income tax credit. If you worked and earned less than $53,505 in 2016 (the limit will be $53,930 in 2017), then use the EITC Assistant tool to determine if you qualify for the credit. You must file a return in order to receive the credit. Don’t miss out on this!
5. Declutter and reap a tax break
If one of your New Year’s resolutions is to simplify and declutter your life, now is the time to get going. You can make money by donating all of those things you no longer need or want in your life. There are many charitable organizations that accept items other than cash such as clothing, books, electronics and other household items. The deduction is limited to the item’s fair market value, and the items must be in good condition or better to be deductible. If the value of the noncash items is more than $500, then you must file Form 8283, Noncash Charitable Contributions, and fill it in with some details. But it is well worth the effort.
6. Cash in on scholarly tax breaks
If you, your spouse or dependents had higher education costs in 2016, there may be some tax savings for you. In fact there are multiple benefits available. The only difficult part is figuring out which one works best in your situation.
Basically there are three different benefits: the American opportunity credit, the lifetime learning credit and the tuition and fees deduction. There are various requirements that may limit the benefit, but the IRS once again offers a useful tool: the Interactive Tax Assistant tool to help you find your way through the maze. You should receive Form 1098-T, Tuition Statement, from your school with the information required by the IRS to complete Form 8863, Education Credits.
7. Get health coverage in order
Make sure you know what you need to report to the IRS on your health insurance. The shared responsibility provision requires that you and your family have minimum essential coverage or qualify for a health coverage exemption. Otherwise, you must make an individual shared responsibility payment for all months that you didn’t have coverage or an exemption.
Most taxpayers just need to do one thing: Check the box that indicates you had health care coverage for all of 2016. If that is not the case or you received advance payments of the premium tax credit on the marketplace, then you may need to fill out Form 8965, Health Coverage Exemptions, and Form 8962, Premium Tax Credit, to complete your tax return. For more information, visit the IRS page on the Affordable Care Act.
8. Be smart when you file
Many people elect to file their tax returns electronically. This can be done in a variety of ways, including tax-preparation software, like
Also consulting a tax return professional or using the IRS’ Free File software, if you qualify.
Forms to Include:
If you are filing with a paper form, there are certain documents you must be sure to include. Required forms include the following: • A copy of your W-2 for each of your employers over the last calendar year. • A copy of Form W-2C (a corrected W-2 form), if received from your employer. • A copy of Forms W-2G and 1099-R, if federal income tax was withheld. For more information on how to file, what forms to include, credits you qualify for or any other filing-related questions, please visit the IRS’ Interactive Tax Assistant tool. This interactive tool was designed by the IRS to help individuals navigate the tax filing realm.