As the end of the year approaches, everyone knows what that means: tax time is just around the corner. Because most taxpayers operate on a calendar basis, it is important to consider your upcoming tax situation before the year ends, while it’s not too late for “damage control.”
- Retirement plans: Only those 401(k) contributions made during the calendar year qualify for preferential tax treatment, so if you’re not maxed out, you may want to consider putting in extra. On the other hand, you have until April 15 of next year to make a traditional IRA contribution and deduct it on this year’s taxes.
- Itemized deductions: Itemized deductions include out-of-pocket medical expenses, mortgage interest, real estate taxes, sales tax paid, charitable contributions, etc. Only those expenses paid during the calendar year are subject to deduction. Therefore, if you’re looking to make a major purchase (home, car, boat, RV, airplane), do it now. You’ll be able to deduct the sales tax paid. This includes leased vehicles. Consider making your January mortgage payment in December to get the extra deduction. Give gifts you received for the holidays to charity instead of returning them (a tax deduction and it will make you feel good). This tip only applies if you plan to itemize your deductions (all of the itemized deductions added together are larger than your standard deduction).
- Affordable Care Act (Obamacare): This year, each taxpayer must have maintained “minimum essential coverage,” qualified for an exemption, or must make an “individual shared responsibility” payment on their tax return. This applies to both the taxpayer and any dependents claimed by the taxpayer. The payment is limited to the greater of 1% of household income above the filing threshold or $95 per adult and $47.50 per child.
- Businesses: If you’re a partner or solo practitioner, get your books in order — or tell your bookkeeper to get your books in order. Since most taxpayers pay tax on the calendar and cash bases, your books (at least for tax purposes) can usually be closed immediately after year end. The less time your tax preparer spends trying to figure out, or fixing, your books, the lower your bill will be. Also, get your written mileage log in order if you plan to deduct your miles. You will generally need to provide your business miles driven as well as your total overall miles driven during the year. If you’re operating under a regular corp or an S-corp election, your return is due March 15. Don’t forget to file your state and local tax returns; state is due January 31.
- Find a real tax pro: If you’re self-employed (partner or solo), it’s time to find a licensed and experienced CPA to do your taxes. Don’t waste your time with H&R Block, Jackson Hewitt, Liberty, etc. The people working there receive minimal training and do not necessarily have any formal education, licensing, or experience. As lawyers, we all know of at least one instance when a client tried to save a buck only to end up spending more in the long run. Finding a tax pro early means that your tax return will receive the attention it needs during tax season, and your tax pro can provide more specific tax tips, as well as a tax organizer.