With the 2016 filing season officially upon us taxpayers are faced with different options for filing. It is important that each option be evaluated to ensure everything is filed correctly and nothing is missed. For some, the online programs may work but for many, this is not the best option and you may be missing out on many tax-saving opportunities. If you have more than just a single W2 to file it is always advised to make an appointment with a tax professional and ask questions, any questions, you may have regarding your current and future situation. These conversations help the tax preparer get to know you and what other tax advantages you may have that were never thought of. The more a professional gets to know you the more they can help you save in taxes and prevent mistakes.
One big advantage of going to a tax professional rather than an online program is you typically will get at least two professionals reviewing your return. With this expertise, you could get extra tax savings, larger refunds, and avoid penalties and “surprise” taxes later. One good example of this is rental properties. Many individuals do not want to account for the rental to avoid claiming the income. However, a majority of the time having these rental properties reported can create tax savings if you correctly include the depreciable property, improvements, taxes, and other expenses that can go into a rental property. Online tax programs do not always ask or provoke the right questions, and many individuals do not know that some of their expenses may actually be deductible.
Something that all individuals need to be aware of is many refunds that will be held until Mid-February so the IRS can review them more closely. These returns will be for individuals claiming the Earned Income Credit and Additional Child Tax Credit. These credits are based on income and how many dependents an individual (or married couple) claims on their return. The IRS has become very strict on the rules for claiming these credits. Tax preparers have been asked to go through training and follow a strict checklist with each return to be certain the credit is correctly figured. This credit is also one that many individuals do not realize they may qualify for.
When it comes to retirement planning your tax preparer can work directly with your financial advisor to see what is your best fit at this moment in time and in the future. By having a financial advisor and a professional tax advisor review your options you can make smarter, informed decisions regarding your financial future. One major topic that is constantly being discussed is if it is a good idea to roll funds from a traditional IRA to a Roth IRA to help avoid paying tax on the distributions when you reach 70 ó and are required to take minimum distributions. A professional tax preparer can look at both the history and projections of your future income to find if this is a good option for you and then work with your financial advisor to determine the ideal amount and possibly set up a schedule a few years in advance. This planning can result in major tax savings, especially if you plan earlier.
A major item the IRS really watches is the home office deduction. If you qualify for this it can result in a substantial amount of tax savings, provided it is figured correctly. There are two different methods available for figuring the deduction and it is important the individual look at both to determine which method is the best one for them. When the deduction is not figured correctly or taken by an individual that does not actually qualify it can result in audits, penalties, and fees.
Another common mistake is the idea if you do not have the money to pay your taxes is you should wait to file until you do. This is wrong – you should still file your return on time to avoid a late filing fee. The IRS will still charge you interest on the amount due and that interest begins accruing the day after the tax return is due, regardless of when the return was filed. By still filing on time you avoid additional penalties which at times can be substantial.
If you have a sudden change in income, whether it be an increase or decrease you should consider meeting with a tax preparer to talk about what options and possible tax breaks or penalties you may be facing. Some penalties and issues can be avoided if they are handled before the end of the tax filing year. A drop in income can create new tax breaks and tax planning options when it comes to retirement planning, deductions, and credits.
Identity theft continues to be a major issue and can be devastating. The IRS is continually trying to combat this and take preventative action to help taxpayers avoid this. They now require higher security on the software used by tax professionals requiring a login after a short period of inactivity. The due dates for W2s and 1099s are now January 31st in order to get these figures into the IRS database to be matched up quicker with what is actually filed. Another change is requiring identity matching. Some states are requiring driver’s license validation as a measure to help prevent identity theft. Minnesota is not one of the states that are requiring yet but will be so tax preparers will begin gathering this information for the 2016 filing season. Do not be surprised if your tax preparer requests a copy of your driver’s license or state-issued identification card.
There are some tax savings actions that can be taken in 2017 that will help your 2016 tax year. Many individuals have the opportunity to pay money into a retirement plan or a health savings account and reduce their tax bills. Visiting with a preparer earlier in the year can help determine if you should work with an insurance agent or financial planner to take advantage of this strategy.
Tax laws are constantly changing. We will likely see several changes with the new administration in the white house. Tax professionals are always kept up to date on any changes in the tax code through professional writings and constant education. As these changes continue it is important that you sit down with a professional and ask questions to determine if and how any of these changes may affect you.