Many Americans have taxes on the brain this time of year, but not everyone starts working on taxes in advance. Even though you still have a good six weeks to get your return filed, now's the time to make a few critical moves.
1. Contribute to your 2016 IRA
While you still have a fair amount of time to contribute to your 2017 IRA, you only have until the tax filing deadline of April 18 to fund an IRA for the previous year. Fail to make that contribution, and you'll lose out on what could be a pretty sizable deduction. Workers under 50 are currently allowed to contribute up to $5,500 a year to an IRA, and that limit increases to $6,500 for those 50 and older. If you open a traditional IRA and are eligible to take a deduction for your contribution, you could shave well over $1,000 off your 2016 tax bill.
As a reminder, tax deductions work by exempting a portion of your income from taxes, and the associated savings depend on your effective tax rate. But if you're under 50, your tax rate is 25%, and you max out your IRA contribution for the previous year, you'll enjoy $1,375 in savings.
2. Correct your erroneous 1099s
Any time you receive income aside from your regular salary, whether it's interest from your savings account or compensation for a freelance gig, you're supposed to get a 1099 form summarizing your payments for the year. But when it comes to 1099s, mistakes can happen, and if you don't correct them, you could wind up on the dreaded IRS audit list.
For every 1099 form that's issued to you, the IRS gets a copy as well. If your form contains an error and you don't correct it, you'll have mismatched information on your return. Once you discover a mistake, contact the issuer and request a corrected form. Be prepared to provide your own documentation in support of the number you're claiming is accurate.
Now if the issuer doesn't respond, or refuses to make the correction, your next (and possibly only) choice is to list the proper amount on your tax return with a note explaining the overstatement and hope that it flies. But don't make the mistake of simply reporting the figure you know to be correct on your return and leaving it at that.
3. Estimate how much tax you'll owe
If you have reason to believe you'll owe money on your taxes, you'd be smart to figure out how much you're looking at while the deadline is still a good six weeks away. The reason? Most Americans have minimal savings, with 69% holding less than $1,000 in the bank. If it turns out that you do owe money, you'll need to come up with it by April 18th. Otherwise, you'll face a penalty that could cost you even more money over time.
And if you're thinking of filing for a tax extension to buy yourself some wiggle room, try again. All a tax extension can do is give you extra time to submit your return. If it turns out you owe the IRS money, you're still required to pay by the regular deadline, and if you don't, you'll face a late payment penalty of 0.5% of the amount you owe per month, up to a maximum of 25%. On the other hand, if you figure out how much you owe in advance, you'll give yourself an opportunity to come up with that money, be it in the form of selling some belongings or temporarily taking a second job to generate cash.
Waiting until April to think about taxes is a mistake that could cost you big time. A little effort in March could save you time, money, and aggravation by the time the tax deadline rolls around.