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| Photo By Tom Grillo |
Regardless of what Congress ends up doing about the future of the tax system, you don’t need to pay more than you owe for the 2016 tax filing season. You can probably whittle your liability by going through last year’s records and checking to see if tips from tax professionals may apply to you.
Whether you use a professional tax preparer or software, or handle the return on your own, you will need to assemble information and gather receipts and tax documents.
Here are the basics: You need to track your income, but you are likely to get plenty of help on that. Be prepared for a blizzard of tax forms. Employers issue Forms W-2 to employees. Banks, brokerage houses and other payers, including businesses that use independent contractors, issue Forms 1099 and sometimes Schedules K-1 reporting the money they paid. They must report these payments to the I.R.S. as well, and discrepancies are likely to result in an I.R.S. notice.
But it is up to the taxpayer to claim itemized deductions and available tax credits. If you neglect to do so, you may end up overpaying.
Keep Track of Gifts to Charity
Taking deductions requires good record-keeping. Consider the rules for charitable deductions on donated money, household items or clothing, valuable art or properties. Sidney Kess, a New York accountant and lawyer, who is a senior consultant to the accounting firm Citrin Cooperman, said your own check is sufficient for gifts of less than $250, but for higher amounts a receipt from the charity is needed.
“To claim a deduction for items or property worth over $500 but less than $5,000, in addition to a written acknowledgment, records have to show when and how you got the property, the cost or other basis, and you must report this information on Form 8283,” Mr. Kess said. “For a deduction over $5,000, you need an appraisal from a qualified appraiser.”
Finding Family Opportunities
But record-keeping is only part of what confronts taxpayers trying to reduce liabilities. The tax code — four million words by some estimates — is chock-full of complexities, but therein lie opportunities.
Mr. Kess discussed one such opportunity: deciding how family members should file their returns. Like so much involving taxes, it’s complicated.
Say a couple has a daughter in college who earned money from a summer job. The couple provides more than half her support and could claim her as a dependent, but the I.R.S. imposes certain limits. Personal exemptions, which exclude $4,050 per person from income, begin to phase out for married couples filing jointly with adjusted gross income of $311,300 and are eliminated when income reaches $433,800.
If the parents had an income below those levels, they would probably have claimed their daughter as a dependent. Because their income is above the upper limit, they do not do so. Instead, she claims her own exemption on her return reporting her summer income, and she can take an education credit as well. Her parents could not get that credit because of their high income.
Protect Cash in an I.R.A.
Individual Retirement Accounts and Health Savings Accounts can be used to shelter tax refunds, noted Barbara Weltman, a lawyer in Vero Beach, Fla., and author of two J.K. Lasser books, “1001 Deductions & Tax Breaks 2017,” and “Small Business Taxes 2017,” both published by Wiley.
“You can use your tax refund to lower your 2016 tax,” Ms. Weltman said, “but you have to file as early as you can” because the deadline for depositing the money into an I.R.A. or H.S.A. is the same as the due date for filing tax returns, April 18 this year.
If you are eligible for an I.R.A. or H.S.A., claim deductions for them on the return, based on the amounts calculated by the accounts’ custodians, and include Form 8888, directing the I.R.S. to deposit those amounts directly into the accounts. Tell your account custodian (it may be a bank or a mutual fund company or a brokerage) that the deposit should be applied to 2016, she said. Any excess from the refund can go to your regular bank account.
Fat Refunds Can Be a Problem
Julian Block, a tax lawyer in Larchmont, N.Y., said that big refunds can sometimes cause problems. He cited the case of a new client who, he discovered, had been receiving a plump refund every year. Mr. Block advised him to file a revised Form W-4 with his employer, aimed at reducing the amount of money being held out of his regular paycheck and paring down his refund.
The reason, Mr. Block said, is that online identity thieves are increasingly active, and if they file a fraudulent return using your Social Security number and claiming a refund, your own refund will be delayed while the I.R.S. sorts it out. Of course, you won’t be held liable for the actions of a thief.
If, instead, you owe a small balance to the I.R.S., you won’t have that headache, though you will need to check whether your identity has been compromised in other areas of your financial life.
Mr. Block also noted that there is an alternative to an I.R.A. for some older self-employed people, including people who turn a hobby into a small business or do work like child care. If they are over age 70½, such people can no longer contribute to an I.R.A. but they can set up and contribute to a Simplified Employee Pension Plan. That enables them to deduct contributions now and withdraw money in later years. It will be taxable then, but their income may be lower, too.
For tax purposes, alimony counts as earned income, he added, so recipients who otherwise qualify for an I.R.A. may contribute the alimony to it and claim a deduction.
Scan the Deductions List
Many self-employed people do not realize that they are allowed to deduct the cost of health insurance, regardless of whether their unreimbursed medical expenses are high enough to take a deduction on Schedule A, Mr. Block said. They can deduct the health insurance cost on the front of the Form 1040, on Line 29.
That’s just one of several deductions on the front of the 1040 that are worth keeping in mind. Others include teachers’ out-of-pocket outlays of up to $250 for students or for their own professional development, the deductible part of self-employment tax, student loan interest, alimony paid and an H.S.A. deduction for those who are eligible. All are especially valuable because they reduce adjusted gross income on Line 37. That number ripples all through a tax return, often limiting other tax breaks.
File Quarterly? Watch Out
In addition to filing a 2016 return by April 18, many taxpayers must file Form 1040-ES to pay quarterly estimated taxes on income on which no taxes are withheld, like self-employment income; interest, dividends and capital gains on investments, or rental and royalty income.
Preparers often base the calculations on the previous year’s taxes, Mr. Kess said, but if tax cuts are indeed enacted by Congress, estimates based on 2016 taxes may turn out to be too high. If that happens, you will need to recalculate the estimate later — in June, September or even the end of the year, depending on when a law is enacted — and can reduce the payments accordingly.
Do-Overs Are Possible
For anyone thinking, “I wish I’d known that last year,” Greg Rosica, a tax partner with EY, formerly Ernst & Young, in Tampa, Fla., says it’s probably not too late.
Whatever the reason, you realize belatedly that you failed to take a deduction for which you were qualified. All is not lost.
“It’s fairly simple to amend returns,” Mr. Rosica said. Taxpayers may file a Form 1040X up to three years beyond its original due date. Say you filed a Form 1040 for 2013 income in March 2014. The due date was April 15, 2014, so you have until April 18 this year. But if you filed under an automatic six-month extension in 2014, you have until Oct. 16 of this year to file the amended return.
Mr. Rosica is a member of the editorial board for the “EY Tax Guide 2017,” which is published by Wiley, and includes this tip: Many taxpayers know they can deduct state income taxes on their federal return, but many do not realize they have the option of deducting sales taxes instead. That is advantageous if you live in a state like Texas, New Hampshire or South Dakota that has no state income tax. It may also be a boon to anyone who bought a big-ticket item like a car with a big sales tax, and is often the best choice for people over age 65 because many states — even high-tax New York — exempt Social Security income and some retirement-plan income from state income taxes.
Both Mr. Rosica and Mr. Kess advised taxpayers to check the tax consequences of any big life changes that may have taken place, like getting married or divorced or having a baby, all of which could affect filing status and the number of personal exemptions, as well as bring medical expenses that may have tax consequences. Changing jobs or moving may also mean income changes that would affect withholding.
Don’t Forget Money Overseas
If you have a financial account outside the United States, be careful to report it, Ms. Weltman said.
“Foreign financial accounts are high on the I.R.S. scrutiny list, and people who fail to disclose foreign accounts can be penalized severely,” she said, including people who inherited accounts overseas and those who worked abroad and still have ties where they once lived.
FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, is used for accounts of $10,000 or more and is filed electronically with the Treasury, while Form 8938, which is attached to Form 1040, is used in more complex situations, with the lowest threshold being for accounts of $50,000.
Original Article By The New York Times
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