Editors' pick: Originally published Jan. 4.
No, it isn't too late to chip away at your 2016 tax hit.
You just need to figure out where to start chipping.
The Internal Revenue Service will start the nation's tax season on Monday, January 23, 2017, when it will began accepting electronic tax returns. More than 153 million individual tax returns are expected to be filed in 2017. However, the IRS notes that a new law requires the IRS to hold refunds claiming the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until February 15 -- which does early filers absolutely no good, but should help prevent fraud. Since it will take several days for these refunds to be released and processed -- including weekends and the President's Day -- the IRS says that many of those refunds will be delayed until the week of February 27.
"For this tax season, it's more important than ever for taxpayers to plan ahead," says IRS Commissioner John Koskinen. "People should make sure they have their year-end tax statements in hand, and we encourage people to file as they normally would, including those claiming the credits affected by the refund delay. Even with these significant changes, IRS employees and the entire tax community will be working hard to make this a smooth filing season for taxpayers."
There are also some tweaks to the filing process that are going to make things a bit more difficult for folks who don't save their prior-year tax returns. If you're changing tax filing software or tax preparers this year, you're going to need the adjusted gross income from your 2015 tax return in order to file electronically -- as the Electronic Filing Pin is no more.
Now the good news: You don't have to file your federal tax return until April 18 this year, thanks to April 15 landing on a Saturday and Washington, D.C.'s Emancipation Day celebration taking place on Monday, April 18. That gives you some time to work out a plan of attack, if you haven't already, and find some places to cut into this year's tax return.
"The opening of filing season reflects months and months of work by IRS employees," Koskinen says. "This year, we had a number of important legislative changes to program into our systems, including the EITC refund date, as well as dealing with resource limitations. Our systems require extensive programming and testing beforehand to ensure we're ready to accept and process more than 150 million returns."
The folks at U.S. Bank have dedicated large portions of their New Year's financial checklist to taxes, while the advisers at Palisades Hudson Financial Group have strung together a few checklist items of their own. We've merged them together in one handy list that should give you a running start on reducing your 2016 tax burden, even if you've waited until 2017 to do so:
Contribute to your IRA
U.S. Bank notes that you can boost IRA contributions to max them out before the filing deadline and still apply those contributions toward your 2016 return. However, Anthony D. Criscuolo, a certified financial planner with Palisades Hudson Financial Group, notes that workers can still contribute to their IRA by April 18, but you can contribute by the October 15 extension date if you're self-employed and have a SEP IRA. You can still contribute if you haven't filed your 2016 tax return yet, are eligible and haven't already put in the maximum amount. You can even set up a new IRA by April 18 and make the maximum $5,500 contribution ($6,500 for people 50 and older).
"Retirement contributions are valuable for people in all tax brackets—especially for the affluent who are paying the highest tax rates," Criscuolo says.
Tally those charitable donations
Either look for those receipts or go back to the charities you gave to and ask for more. As Melinda Kibler, certified financial planner and portfolio and client service manager with Palisades Hudson Financial Group in Fort Lauderdale, Fla., points out, most people who itemize deductions underreport their charitable contributions because they don't keep records throughout the year. Since onations to eligible nonprofits, religious organizations, and government organizations (such as a school or public library) are deductible, receipts from the organization receiving cash or goods helps. That said, you could just as easily use accounting or tax software to log those donations.
"If you dropped off a bag of clothing at a local charity or gave them $5 at the cash register of your grocery store, make sure to track these contributions so you get the highest tax benefit possible," she says.
While 82% of Americans say charitable giving is important to them, a recent survey by RBC Wealth Management fiound that 47% donate only sporadically. You're not particularly picky about who you give to, either, as 53% of donors give to three or more charities. That includes 10% who donate to six to ten charities and 4% who say they will typically support 11 charities or more.
"One of the most rewarding things a person can do is to give back," said Michael Armstrong, CEO of RBC Wealth Management - U.S. "We are members of a greater global community and we have a responsibility to take the necessary steps today that will have a positive impact on tomorrow."
It helps that there's at least some motivation for wealthier Americans to make those donations. The Internal Revenue Service allows taxpayers to deduct donations up to 50% of their adjusted gross income when those gifts are given to public charities or certain private foundations. Even for gifts to family or other non-qualifying foundations, the deduction can be as large as 30% of all adjusted gross income.
"If a taxpayer itemizes her deductions, the charitable donations she makes will lower her taxable income," says Shomari Hearn, certified financial planner and vice president of Palisades Hudson Financial Group in Fort Lauderdale, Fla. "However, the tax benefit she derives is secondary to her intention to help others. This is because the tax savings received will be less than the value of the contribution."
The more you have to give, the greater the tax benefit. For example, an individual in the 28% federal income tax bracket that makes a $500 charitable donation, will see their tax liability decline by $140 (28% of their tax bill). For wealthy individuals subject to either federal or state estate tax, the assets they give to qualified charities will escape the tax. With a top federal tax rate of 40%, $4 out of every $10 in assets subject to the tax will go to the government instead of to family members and other loved ones. Not only is the family losing that money, but it's losing a valuable opportunity to learn about how to manage whatever wealth remains.
"A well-planned program of lifetime gifts to family, friends and charities can provide income and estate tax benefits and help preserve more assets for heirs," says Van Pate, Wealth Strategies Consultant at RBC Wealth Management. "Taking a deliberate approach to giving can help you make well-informed decisions and increase the benefits to both you and the recipients of your good will."
Log those charity miles
Even just driving somewhere to do charitable work can earn you a deduction. Palisades Hudson's Kibler notes that driving to a shelter to serve meals to the homeless or driving to an outreach center to volunteer hours is deductible. You can deduct a standard mileage rate of 14 cents a mile, parking fees and tolls just as long as you're able to record and document all of it.
Contribute to a 529 plan
While contributing to a 529 college savings plan won't do much for your federal return, it can help you out on the state level. Bill Ringham, vice president and senior wealth strategist at RBC Wealth Management, notes that 529 plan contributions are tax deductible in several states, so contributing to your kid's college fund will allow your earnings grow tax-free, provided they are used for qualified higher education expenses. Just make sure it's going toward college, however, as distributions not used for qualified expenses may be subject to income tax and a 10% penalty.
Get paid for your job hunt
If you were looking for a job in 2016 and enlisted the help of a job-placement agency, prepared and mailed resumes or racked up travel expenses, you can deduct all of it. According to Kibler, if the main purpose of the travel is to look for a new job, you can deduct a mileage rate of 54 cents per mile. That's right: keeping yourself employed is worth 40 cents more per mile than driving to feed the homeless.