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There are some things you can do between now and the end of the year to positively affect your tax burden for the year. Here is an overview.
The tax year will end in a few short weeks. But if you’re like most taxpayers, you won’t even think about your personal income tax payments until late January at the earliest, or late April for the true slackers! But there is some benefit to thinking about your 2016 taxes within the next few weeks. There are some things you can do between now and the end of the year to positively affect your tax burden for the year. (As always with tax information, this article is for informational purposes only and should not be considered tax advice.)
Let’s start with when you do your taxes. Many taxpayers use their tax withholdings as a sort of mini-savings plan, putting aside too much throughout the year so that they’ll get a refund. If this is part of your strategy, you will want to file your taxes as soon as possible to regain control of those funds you’ve been loaning, interest-free, to the Federal and State governments. Overpayment throughout the year is a bad financial idea that awards interest to your Uncle Sam that should be going to you. While that interest is unlikely to make a huge difference to your bottom line in any one year, over time, everything adds up.
That aside, here are some steps to take now.
Optimize Your Deductions
Some work now can help you make sure you get the most from your tax deductions. Around the holidays, many are thinking of making charitable donations. While lowering your tax responsibility is rarely the primary impetus for such donations, you can positively affect your tax responsibility if you make your donation by December 31. If there’s no more room under the stairs to hide Santa’s upcoming delivery, clean out your closets and make donations of clothes, furniture, old appliances, and anything else you no longer need or want. Make your donations to a qualified organization, as defined by the IRS
Also be sure to obtain receipts for non-cash donations. Despite what many think, charitable contributions aren’t typically at the top of the list of items in your filed return that can trigger an audit from the IRS, but exaggerating or inventing donations is both immoral and a bad idea. And any large donations are at the top of the IRS’ list for triggering an audit.
Not Just Cash
Donations don’t have to only be in the form of cash or goods. You can also donate investments, such as shares of a stock, and take a deduction based on the full market value at the time of the gift. There are some restrictions on doing this, and the transaction can be a little more complicated. If you work with an advisor, talk to them about the best way to make this kind of donation and what it will mean for your tax liability.
You know that the interest you pay on your mortgage is tax deductible, but what you might not know is that if you’re in position to do so, you can pay 2017’s January mortgage bill and deduct that interest in 2016, as long as the payment is made by December 31. The same is true for property tax payments, which you can make in advance as well.
When it comes to your taxes, like anything else, advance preparation can pay dividends.