Forgetting about tax deductions or credits can be costly. It’s important to tell your tax preparer about your expenses, gifts and retirement plan contributions to help lessen your tax bill. Even if you prepare your own tax return, begin gathering this information now. Here is a “Top 10” list of tax tips that can easily slip your mind.
Note: The IRS forms and publications noted on this page can be found at www.irs.gov. Be sure to review the 2015 version of these documents.
1. IRA Contribution Deduction
Have you told your tax preparer about your IRA contributions for 2015? Investors commonly forget to mention this fact unless they make the contribution near the time they actually file the tax return. A Traditional IRA contribution must be reported on your tax return, whether or not it is deductible.
2. Foreign Taxes Paid
If you invest in foreign securities, you may have had to pay foreign withholding tax to another country. In this case, you may be able to claim the taxes paid as an itemized deduction on Form 1040 Schedule A or claim the taxes paid as a foreign tax credit on Form 1116. For many investors these amounts are small and easily overlooked.
3. Points Paid on New or Refinanced Mortgage
If you purchased a home or refinanced the loan on your current home in 2015, the points (prepaid interest) you paid may be deductible as mortgage interest. Refer to IRS Publication 936 to check your eligibility.
4. Health Insurance Premium Tax Credit
If you purchased health insurance through the Health Insurance Marketplace in 2015, you may be eligible for the premium tax credit. To claim the credit or reconcile advance payments of the credit, file IRS Form 8962 with your income tax return. The Marketplace is required to provide IRS Form 1095-A no later than Jan. 31 to assist you with claiming the credit.
5. Tax Benefits for Education
There are many deductions and credits available to taxpayers who have education related expenses. These expenses may have been reported to you on IRS Form 1098-T. To determine which credit or deduction is most beneficial to you, refer to IRS Publication 970 for a complete list. This publication will also help you with reporting and taxation of withdrawals from a 529 plan or Education Savings Account.
6. Charitable Contribution Deduction
Not all charities send a confirmation statement or letter of your gift when the contribution is less than $250. Review your check records or credit card statements for any forgotten charitable donations.
If you took a qualified charitable distribution (QCD) from your IRA in 2015, be sure to review the instructions for Form 1040 to properly report this type of IRA distribution.
7. Medicare Taxes for High Income Taxpayers
High income taxpayers must consider additional Medicare taxes when filing their income tax return. A 0.9% tax applies to compensation and net self-employment income that exceeds $200,000 for a single person ($250,000 for joint filers). IRS Form 8959 is used to report this tax.
Taxpayers with modified adjusted gross income above these same thresholds may also owe an additional 3.8% on the lesser of their net investment income or the amount by which their modified adjusted gross income exceeds the relevant threshold. The IRS has created Form 8960 to calculate and report this additional tax.
8. Extending Your Tax Return
In some cases you may not have all of the information needed to complete your income tax return by the April deadline. For example, if you have investments that report tax information to you on a Schedule K-1 instead of Form 1099, you may not receive your Schedule K-1 until after the return due date. If this is your situation you may consider filing Form 4868 to receive an automatic 6-month extension of time to file your return. However, this is an extension of time to file, not to pay. Your must pay your tax due by the original due date.
9. Estimated Tax Payments
The IRS requires that you pay your income tax throughout the year as the income is earned (with few exceptions). This is typically done through withholding. For income that is not subject to withholding, you may be required to make estimated tax payments on Form 1040-ES in order to avoid penalties. Your tax advisor can help with this determination.
10. Tax Returns for Children
It is easy to forget that your young child had income during the year. Children with investment income or capital gains transactions may be required to file a tax return of their own. To determine filing requirements for your child’s situation, review IRS Publication 929, Tax Rules for Children and Dependents.
Choosing a Tax Preparer
Choosing a tax preparer is another important decision during income tax filing season. Here are some tips for selecting a tax preparer:
1. Be wary of tax preparers who claim they can obtain larger refunds than others or who claim they can always get you a refund.
2. Avoid tax preparers who base their fees on a percentage of the refund.
3. Use a reputable tax professional who signs the tax return and provides a copy.
4. Consider whether the individual or firm will be in business months or years after the return has been filed to answer questions about the tax return’s preparation.
5. Check the preparers’ credentials. Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collections and appeals. Beginning in 2016, the only other tax return preparers with any representation rights will be those who participate in the IRS Annual Filing Season Program. These preparers are limited to representing taxpayers whose returns they prepared and signed; and only in initial audits, customer service matters, and before the Taxpayer Advocate Service.
6. Find out if the return preparer is affiliated with a professional organization that provides its members with continuing education and other resources, and holds the preparer to a code of ethics.
7. Verify the preparer has an IRS Preparer Tax Identification Number (PTIN). Only a preparer who has a valid 2016 PTIN is authorized to prepare federal tax returns for compensation.
Your Financial Advisor Can Help
Investments and taxes go hand in hand. Your Financial Advisor can help this tax season go more smoothly for you by:
1. Providing a Realized Capital Gain and Loss statement or other account information to assist in preparing your tax return.
2. Opening a last-minute IRA or depositing an IRA contribution for the 2015 tax year through April 18, 2016.
3. Providing the account information needed on your income tax return to directly deposit your income tax refund into your investment account or IRA.
4.Collaborating with you and your tax advisor on tax-efficient investment strategies for 2016.