Getting all your documents organized and preparing your federal and state tax returns is a complicated process that can turn into a nightmare. So it's no surprise that most people just want to file their returns and never look at them again.
But if you're not doing your homework, then you may be missing some opportunities to save money. With the 2015 tax season having just ended, now is a good time to take a close look at your tax return and look for ways to lower your tax bill for 2016. Here are some things to look for on your 2015 return.
Are there any mistakes?
As you look over your return, you may realize that you forgot to include something or that your tax preparer made a mistake. Tax preparers are busy and may enter a number incorrectly or overlook a 1099. An omission or error could could lead to an audit by the IRS and result in an additional payment or possible penalty. A mistake could also lead you to pay more in taxes than you actually owe. To make a correction or claim a refund, you'll need to file an amended return -- head to the IRS website for the necessary form and instructions.
Did you pay Uncle Sam more than his fair share?
If your filing status, number of exemptions, or income has changed since you filed your return, then you may need to adjust the amount of state and federal tax being withheld from your wages (or, if you're self-employed, the amount you pay in estimated quarterly taxes). Underpaying taxes can result in an easily avoidable penalty. Meanwhile, having extra taxes withheld may result in a large refund when you file your return (See line 75 on the 1040), but you are losing the opportunity to use those dollars every month to help pay down debt or save for your future goals.
Should you have itemized your deductions?
If you simply took the standard deduction and did not itemize through a Schedule A, then try consolidating your deductions for 2016 so they fall into the same tax year. This may help reduce your taxes and make filing a Schedule A worthwhile. For example, you might make an extra year-end real estate tax payment, or you can consolidate and document charitable contributions and elective or out-of-pocket medical expenses.
Conversely, if you did itemize your 2015 deductions, you may later realize it was not worthwhile. If itemizing did not lower your tax bill more than the standard deduction would have -- or if the savings were not worth the time and effort involved in itemizing -- then you may want to save yourself the headache and take the standard deduction next year.
Did you mitigate your investment losses?
If you have taxable investment income on Schedule B, did you also realize investment losses on Schedule D? Investment losses can be used to offset taxable gains and reduce your taxable income (See line 13 of the 1040), but only if you realize the loss. To realize a tax loss you have to actually sell the position during the tax year. Losses can also be carried forward and used to offset income and gains in future tax years. But be careful not to buy back the same position, or a substantially similar position, within 31 days. Otherwise, it will be considered a "wash sale" and ruled ineligible for a deduction.
The bottom line
There are many ways to help reduce your state and federal taxes. But you have to take action and either learn about the tax laws or consult with a financial advisor.
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