Don’t Allow 2016 Tax Year to Put a Damper on the Holidays
With the holidays barreling down the road to end the year, it’s easy to forget the impending conclusion of the 2016 tax year. But while roasting (or frying) and eating the turkey and all the rest of the holiday festivities, don’t forget to take some steps that will make things easier when April 15 rolls around next year.
The good news: There’s little new ground to break. There weren’t a lot of changes in tax law for 2016 that will affect the average person, according to Michael A. Zeiter, a CPA, tax specialist and financial coach in St. Louis. But that doesn’t mean there aren’t any changes.
How laws did change for the tax year
Zeiter says the biggest change for the current tax year, affecting returns filed in 2017, is that partnership returns will be due March 15. “This means that small business owners that file a 1065 return will have to finish a month earlier than usual,” he says.
Other notable changes, he says, include some amounts that will be different for 2016 tax returns, including the following:
- The penalty for not having health insurance increases to $695 per adult, or 2.5% of income.
- The personal exemption has been increased to $4,050 per person.
- Contribution limits for health savings accounts increased to $6,750 for families
One other thing that changed for the current tax year: IRS rules for refunds for taxpayers claiming the Earned Income Tax Credit and the Additional Child Tax Credit now prohibit any refunds from being issued before Feb. 15. The IRS says the changes are designed to fight identity theft and taxpayer fraud – it still expects to issue most refunds within 21 days.
Steps that can reduce a filer’s tax burden
Tax specialists say there are several steps that can be taken before the end of 2016 to reduce tax liabilities, though it is wise to run any of these tips by a local accountant or tax lawyer before charging into them headlong.
One of the first things Zeiter suggests is for taxpayers to adjust their 401(k) contributions – though it comes with a qualifier. “Assuming the plan allows them to change at any time and that they haven’t reached the $18,000 limit ($24,000 if 50 or older), people can increase 401(k) contributions to reduce their 2016 Adjusted Gross Income,” he says. The tip won’t apply to Roth 401(k) contributions, though. “Those are not tax deductible.”
Two other steps he mentioned were contributions to Flex Savings and Health Savings accounts. “You can contribute up to $2,550 to an FSA via paycheck withdrawals that is tax deductible. Money must be spent by the end of the year. Companies may allow a grace period for part of the next year to use the funds, but not all,” Zeiter says. The HSA limit is $3,350 for individuals and $6,750 for families, again with contributions through April 15, “and they do not have to be used in the current year,” he says.
Dave Du Val, a tax educator and chief advocacy officer at TaxAudit.com, also has some suggestions: “Adjust your withholding: If you had a large tax bill last year and your situation is the relatively the same, start having more taken out of your checks now. And if you had a large tax refund last year and your situation is relatively the same, you may want to reduce the amount being taken out (i.e., don’t give an “interest free” loan to the government!).”
Du Val’s other suggestion concerns those who paid for any college or school expenses. “There may be some deductions or credits available to you. Have orderly records and keep a look out for that 1098-T form from the educational institution.” One possible issue: A recent study found that many undergraduates can’t take advantage of the American Opportunity Tax Credit.
Kristina Grasso, a master tax adviser and tax attorney with H&R Block, has a suggestion for new parents as the end of the year approaches. “If you recently had a child, make sure you have a Social Security number for them so that you may claim an exemption ($4,050 for 2016) and potentially a Child Tax Credit (up to $1,000 per child),” Grasso says.
Other steps taxpayers can consider
Zeiter suggests a couple of other suggestions that require spending money to save it, which might not be attractive to everyone:
- Tax loss harvesting. “If you have some investments with losses, you can sell them and deduct the loss on your tax return,” he says, noting that up to a $3,000 loss can be used to reduce ordinary income. “Any additional losses can be carried forward to be used in future years.”
- Charitable contributions. Cash, household items, and cars can all be deducted when donated to charities. “If you own stocks, they can be donated directly to the charity assuming they are able to receive it,” Zeiter says. “This allows you to deduct the value of the stock while not having to pay tax on the gain if you were to sell it.
Du Val offers one final tip. “Did you meticulously document all of your expenses you plan to write off?” he asks. “If not, plan to start digging up those receipts and documents shortly after New Year’s. This way you’ll give yourself plenty of time to find everything you need.”