This summer is a great time to begin thinking about your 2017 taxes. By the time summer starts, there have already been several 2017 pay periods as well as a few months to work through any issues or changes from the previous year. Quickly reviewing your finances can save you hundreds- maybe even thousands, of dollars in taxes.
Review 2016’s Tax Return
Take another look at your tax return to check for errors. If you find any, you will be able to file an amended return. Similarly, see if any deductions were not allowed, and make a note to find the correct documentation this year. Did you owe taxes this year? Consider possible ways to reduce your end of year taxes and eliminate any penalties you may have. Did you have a refund this year? Examine your withholding and see if you can make any changes to get the money back over the course of the year rather than all at once. Any significant life changes (such a marriage or divorce), a change in job situation (receiving a raise or taking a new job, for example), or even coming into an inheritance can affect your taxes for this coming year, so be aware of this as well.
Change Your W-4 or Withholding
If there have been any significant changes to your financial situation, consider filling out a new W-4 form for your employer. The more allowances you claim on your W-4, the less money will be withheld from you by your employer for tax purposes. The correct number of allowances should be added to the form so that when tax season approaches, you are not penalized for underpayment.
Double-check Retirement Contributions
Saving for your retirement now can be beneficial in the long term. An immediate tax break can be found in some retirement plans since deductions can be excludable or deductible. Many employers will even make contribution matches, up to a certain percentage. Making $50,000 per year with a 1% contribution rate moves $500 to a tax-deferred account per year, rounding to about $42 per month. With an employer match, this would increase $500 to $1,000 per year in your retirement tax-deferred account. The money in a tax-deferred account is also not subject to taxation until later, giving you time to build your retirement until you are ready to leave the workforce. This would mean you’d be deferring about $125 in taxes if you use a 25% marginal rate. With a Roth IRA or Roth 401(k) you pay the taxes now, but there are no taxes to pay when you finally cash out your account.
Take your Proper Retirement Withdrawals
Withdrawing money from your retirement account too late or too soon can lead to a penalty. Depending on the retirement account, you may be required to remove a certain amount of money for every year you are retired. If you calculate your estimated required minimum distributions early, you will have a better understanding of the remaining balance in your retirement savings over time.
Add Money to your Flexible Savings Account (FSA) or Health Savings Account (HSA)
As medical costs continue to rise, you may find yourself wondering “Can I claim medical expenses on my taxes?” If you are someone who spends a lot on medical care, whether it be doctor’s visits or medications, you’ll be glad to know that these costs may actually be deductible. The IRS allows you to deduct qualified medical expenses that exceed 10% of your yearly adjusted gross income. If your medical bills surpass this threshold, they can qualify as deductions.
If you want to keep costs even lower, consider adding money to a healthcare savings plan. The FSA can be funded by pre-tax dollars and used for qualifying medical expenses, including copayments and deductibles. This health savings plan does not roll over into the next year, unlike an HSA. When paying for medical expenses with your HSA, the funds are federal income tax-free- meaning that the more money you put into the fund, the more money you can save.
Review Estimated Payments
You should consider estimated payments if you receive any payments that do not have federal income taxes withheld. If filing as an individual, expect to pay estimated tax payments if you owe $1,000 or more when you file your federal income tax return. This primarily applies to those who are self-employed, occasional freelancers, corporation shareholders, taxpayers with significant investments, landlords, or business partners. Using the federal form 1040-ES worksheet, you can calculate your payments from an estimated tax. Keep in mind that with estimated taxes, the year is divided into four periods, and the specific payment due date is determined by the IRS. Be wary of these dates. As always, if you don’t pay on time there are penalties to pay.
Talk to a Tax Professional
If you’re still troubled by taxes, have no fear! Going over your finances with a professional can help you figure out any additional expenses and issues may be facing. Not to mention, talking to a qualified and licensed tax professional during June or July for a quick financial check-up can ensure there will not be any surprises come year’s end. Tax professionals can help determine if you need to make any changes in your withholding, and can answer your questions regarding any financial plans you may have for the future.
By - C.M. Lopez