Some people don't even start thinking about taxes until April rolls around. However, if you really want to get a handle on your taxes, the smart thing to do is to think about them even before the tax year ends. In fact, there are things you can do right now that will not only make the return you file in early 2017 easier to do but also simplify your tax planning throughout the 2017 tax year. Let's look at some things you can do right now to get off on the right foot.
Get ready for the 2017 tax season
Even if you know exactly what your income for 2016 is going to be, you can't actually file your 2016 tax return this early. Many of the tax forms that taxpayers need aren't available in final form yet, and the IRS doesn't even begin accepting returns until January. Moreover, many of the documents you'll need to prepare your taxes also aren't available until later in the season.
However, one good way to prepare is to look at the 2015 tax return you filed earlier this year and use it as a guide for what to expect for the coming tax season. For instance, here are some things to watch out for:
- Did you have income from investments last year? If so, use the Schedule B that you filed as a checklist to make sure that you receive tax information from all of the investments you still own.
- Did you have capital gains income? Look at selling losing investments to generate tax losses that you can use to offset any gains on the sale of other investments in your portfolio.
- Did you claim deductions for things like IRA contributions, student loan interest, or health savings account contributions? See if the same opportunities are available this year, and if you haven't yet taken action to contribute, go ahead and do so.
- Did you benefit from any tax credits to reduce your tax due? Look at the credits you claimed and be prepared to claim them again if your situation hasn't changed and the tax breaks are still available.
In addition, take stock of any major life changes you've gone through in the past year. Going to college, getting married, buying a house, having a child, and getting divorced are just a few examples of events that can have dramatic tax implications. You'll want to have a handle on how they'll affect your taxes before you begin the preparation process, so that you can take advantage of any available tax breaks that you have to move forward with before the end of the tax year.
Think even further out
Even before you file your 2016 taxes, the 2017 tax year will have begun. That means you'll have an opportunity to start planning for the 2017 tax returns you'll file in early 2018.
There are several things you can do to get an early start on your 2017 tax planning. First, Jan. 2 will be your first opportunity to open and fund an IRA for the 2017 tax year, and the sooner you get money into the tax-deferred account, the sooner you'll start getting the tax benefits. In addition, there are other decisions you'll make early in the year or even at this time during the previous year that will have an impact on your taxes in 2017, such as setting up 401(k) contributions from your paycheck, funding a flexible spending account, and deciding how much money to have withheld from your check to go toward state and federal income taxes.
That said, you should always maintain some flexibility when you're planning this far in advance. 2017 is likely to be a particularly uncertain year in the tax world, because a new administration in the White House will likely bring new ideas for tax policy that could have dramatic impacts on the returns you file in early 2018. Some taxpayers are already anticipating the possibility of lower tax rates next year, loading up deductions in the current year and deferring income until 2017 wherever possible. Lower rates aren't a guarantee, especially given the glacial pace at which legislation moves forward in Washington. However, the odds are better in the coming year than they have been for a long time.
Tax planning won't be the first thing on your mind during the holiday season, but making a little effort to get started with your tax preparation is time well spent. By doing some tax planning work now, you'll be able to do as much as possible toward getting your taxes in great shape both in the months to come and throughout 2017.