Tips for Decreasing Your Tax Burden
Here are a few tips you can do any time to help lessen your tax burden each year.
Make Timely Estimated Payments
If you anticipate the tax on your earnings will exceed your withholdings, look into making quarterly estimated payments. If you do not withhold enough money and for the right quarter, you could face penalties. Estimated payments for a year are due April 15, June 15, September 15, and January 15 of the following year. If that day falls on a weekend or holiday, they are due on the next business day.
Contribute to Your Retirement Accounts
Every dollar you put away can save you one-third or more in current taxes.
Be Organized and Keep Track of Expenses
Every year, taxpayers lose countless deductions because they lose track of expenses. Keep your receipts for deductible items in a secure place where you can locate them when it comes time to prepare your taxes the following year. Some people find it convenient to use one credit card for all expenses that are possibly deductible and another card for non-deductible expenditures. Whatever method you choose, it’s important to remember that the burden is on you to prove your expenses with receipts or other evidence.
Exhaust Flexible Spending Accounts at Work
Many employers allow employees to set up a Flexible Spending Account. Employees can use the account to pay for child care, medical, and other designated expenses with pre-tax dollars. Employees withhold a set amount each month. If they do not use it, they lose it.
Consider Converting Your IRA to a Roth IRA
You can convert your traditional IRA to a Roth IRA. By doing this conversion, you will pay tax on the balance in your IRA. However, from that point on, the funds in the IRA will never again be taxed. Unlike a regular IRA, even the growth on the IRA will avoid taxation completely.
Look at Your Income and Deductions for This Year and Next
If your income will be about the same or less next year:
- Consider deferring income to next year by sending out invoices a little later, etc.
- Consider accelerating some expenses by buying some extra supplies or other items this year.
- Make charitable contributions before year-end to get the deduction this year.
- Pre-pay your state or local income or property taxes to get the deduction this year.
If you expect you will have a much higher income next year:
- Consider accelerating income into this year.
- Consider deferring expenses to next year.
- Consider deferring charitable contributions to next year.
Look at Expected Gains and Losses
- Contact mutual funds to determine what gains or losses may be anticipated for the year.
- If you will have substantial gains, consider harvesting a loss in other assets to offset those gains.
- If you will have a substantial loss, consider harvesting gains to offset those losses.
Federal Deductions and Exemptions
The basic standard deduction amounts for 2016 are:
- Head of household—$9,300
- Married taxpayers filing jointly and qualifying widow(er)s—$12,600
- Married taxpayers filing separately—$6,300
The amount you can deduct for each personal exemption has increased from $4,000 in 2015 to $4,050 in 2016.
The amount you can contribute to a 401(k) in 2016 is $18,000. Further, the amount of “catch-up” contributions for those ages 50 and over is $6,000.
In 2016, the allowable deductions for the standard mileage rate are as follows:
- Business use: 54 cents per mile
- Charitable services: 14 cents per mile
- Medical reasons: 19 cents per mile
- Moving: 19 cents per mile