Mo Vidwans
As sure as the orange fireball rises every morning without fail, just like tree leaves changing color every autumn, and daffodils popping out of the snow early spring and just like undeniable wail of a hungry baby, have you noticed that tax season comes with some uncanny regularity?
It was only last March/April that we thought we might not have to look at it again for a while. Well, actually it so happens that we can help ourselves much if we do not ignore the tax preparation and be vigilant about it all through the year. We will talk more about preparing ourselves for 2017 taxes next month but let us look at what we need to do now and prepare ourselves for the 2016 tax season.
Gathering all the documents
By now at least some of the documents that we need for the tax preparation must have started arriving in the snail mail or electronically or otherwise and I assume they all are kept safe and together in some place. The examples of these documents are W2s, all kinds of 1099s, 1098, schedule K (if you are into it), statements from social security if you are old enough for that, medical expenses, property tax bills, donations receipts and there are many more.
It also implies that if you are not seeing what you need and you know you should have it then you have to go after it and pursue the right institutions to get them to send you the pertinent documents. It is always possible that the documents can get lost in the mail or even at home (eaten by the dog) if not taken care of immediately. Many banking institutions do not have to send you a 1099, for example, if they are to report interest earned which is less than $10 (and during these past years of low interests it is possible). They are legally allowed to do that but you still need to report that interest on your tax return. So probably the best thing to do is to call and get the right amount. Rest assured that, even if they are not obliged to send you any paper for the same, it still needs to be reported to IRS.
One area that can be easily forgotten or overlooked is carryover capital losses. You do not get any reporting paperwork for last year’s capital losses from anybody and it is not obvious where you should be looking for it; you actually have to go through last year’s tax return and dig it out. But it does help and is all worth the efforts especially if you still have unclaimed losses that you can use this year to reduce taxable income.
Miscellaneous income is another aspect where we need to pay some attention. Gambling winnings, or jury duty pay or interest earned on private loans, and litigation settlements are just some of the other incomes that must be reported but on many occasions we don’t get any documents for it like 1099 or similar.
Adjustments to your income
Even though it is calendar year 2017, it is not too late to make your decisions for depositing your IRA for 2016 and take a deduction for it; and actually while at it think seriously about 2017 IRAs, too. This way you get a head start for earning growth for a whole extra year on that IRA when you don’t wait till the end of the year or the New Year.
If you moved for your job, it is possible you can claim unreimbursed expenses for that; all you need is the supporting paperwork to determine how much you can claim. Same goes for the student loan interests up to $2,500. Teachers can claim adjustments to their income if they spent on their own for school supplies. There are upper limits for all of these expenses and also in many cases upper-income limits too.
If you are running a small business on your own on the side, the income from that as well as expenses for the same can be claimed. If you need to pay taxes from this income, then half of those taxes can also be claimed as adjustment to your total income.
Itemized deductions
Those who do prepare schedule A would have much more of homework to do before the calculations start. Unreimbursed medical expenses including health insurance premiums, deductibles and co-pays need to be sorted out. Don’t forget the mileage you traveled for going to the doctor, for treatments or other work for your health. There is a deductible to be applied before you can use medical expenses.
Everybody knows about the home mortgage interest and the insurance premiums on the mortgage.
All donations need to be backed by the receipts, including cash; so make sure you ask for the receipt when you donate.
State, city, county income taxes and property taxes, lets get the receipts all together. Also, if you have some advisor managing your assets, their annual charges can be deducted. Paperwork for professional fees and other related expenses should be reviewed because most of those are in for deduction.
Unreimbursed business expenses can be claimed; keep good back-up paperwork. Losses to personal property due to natural causes can be claimed but they have to be unreimbursed and there are deductions.
Credits
If you are able to take advantage of these credits, which reduce your taxes, dollar for dollar, that is the best way to go. Look for it, gather paperwork and get ready for the following: foreign taxes paid (shows up on your 1099s), child and dependent care expenses when both parents are working or looking for work, education credits, retirement savings contribution, child tax credit and residential energy saving expenses. Different forms have to be filled for each one of these and it will behoove you to get to know them ahead of time. There are income limits for all of these.
Next month we will take a detailed look at long-term strategy for tax preparation.
