Now that the tax filing deadline is over and most have filed their individual tax returns, it’s actually a good time to look back at 2015 so you can plan for 2016. It is never too early to start planning, especially while the information is still fresh in your mind. Ask yourself, “What changes should I make now? What will help improve things for filing my return in April 2017?” The Virginia Society of Certified Public Accountants (VSCPA) has what you need to know to recap your personal tax season.
Did you owe money when you filed your 2015 tax return? Or maybe you received a large refund instead. If so, you should make sure you understand why and what steps you can take to correct it. It may be time to adjust your federal or state income tax withholding. Owing money or getting large refunds could be the result of not having proper withholdings from your paycheck. Taxpayers should reevaluate their withholding allowances annually, especially when there are significant changes in your life. Some examples for revisiting withholding would include a change in marital status or dependents, or a change in itemization of deductions. This all has an effect on your taxes, and if your withholding allowances are not in-line with your tax return, this may be part of the reason.
If you are getting large refunds, consider adjusting your withholding to get more in your paycheck instead. Perhaps you feel comfortable getting a large refund at the end of the tax year, but that money may have been better used during the year for expenses. Not to mention, it is not always smart business to have the Federal Government holding your money instead of you holding your money. Most employers will allow an employee to adjust the withholding multiple times throughout the year. This gives the taxpayer the flexibility needed to optimize his or her return.
It is never too early to start saving for retirement. Here are some tax planning ideas for those who wish to save for the future and also reduce their tax burden now. If you have a retirement plan at work, you should contribute as much as possible to this plan each paycheck. If you do not participate in an employer-sponsored retirement plan, such as a 401(k), you may be able to contribute to an Individual Retirement Account (IRA). There are two types of IRAs, namely Traditional IRAs and Roth IRAs. The major difference is that a Traditional IRA offers a tax deduction and the earnings are tax deferred, but a Roth IRA does not offer a tax deduction, yet all earnings from the Roth IRA is tax exempt. Roth IRAs are ideal for younger taxpayers, where their money can grow over a long period of time tax free.
Some investment companies even allow you to make monthly contributions to your IRA account, instead of a one-time yearly contribution. Current (2016) limits are as follows: $18,000 for 401(k); $5,500 for both Traditional and Roth IRA. For IRAs, you even have until the filing deadline of April 15 of the next year to contribute. And if you are over the age of 50, you can contribute an additional $1,000 to your IRA and $6,000 to your 401(k). If you are self-employed, you can setup your own retirement account and you may be able to get tax credit for setting up a new retirement plan.
Health savings or flexible spending accounts are ways you can save taxes and help to cover medical and childcare expenses. The great benefit to contributing to these accounts is not only do you save on income taxes but also on Social Security and Medicare taxes as well. If you have a high deductible health insurance plan, you are eligible to setup a Health savings account (HSA). This will allow you to take a tax deduction today, and when you need to pay for medical expenses, the distribution is not taxable. Just like for IRAs, you even have until the filing deadline of April 15 of the next year to contribute to a HSA account for the previous year. Current (2016) limits to a HSA are as follows: $3,350 for Individual plan and $6,750 for a family plan. Flexible spending accounts for dependent care expenses are another great way to save taxes while paying for necessary childcare expenses for children under 13 while parents work. Most flexible spending accounts require the taxpayer to use the money by the end of the year.
These tax planning tips can help reduce tax burden as well as increase your paycheck, but be aware that some of these tax saving methods do have limitations based on income. So, get a start and do a little advanced planning to help to make your 2016 tax year a more pleasant (and rewarding) experience.