This post was last updated February 15, 2018
Having your ducks in a row before you file your return can put you in an advantageous situation allowing you to maximize your tax refund or minimize your tax due. You can also benefit from added convenience and peace of mind of getting your return out of the way with confidence that it’s done in the best possible way. Often some tasks that can give you an advantage can start not only before the return is filed, but before the end of the tax year.
Make Sure Your Paperwork is in Order
You don’t want to be looking for relevant statements, receipts, and other tax-related documents just before attempting to file your return. Maintaining all of your documents in a central location be a huge help when it comes time to file. This doesn’t need to be a physical location. Many are not only storing their information digitally but using technology to help them efficiently compile or manage relevant tax information. These can be general accounting programs or even specific applications used to track specific data such as vehicle mileage. Consider getting your own documents and information in order prior to filing your return.
Consider a Tax Professional (CPA, EA, Tax Attorney, etc.)
A tax professional can help you with the preparation of your return but also with mid-year consultation and potentially even additional services when applicable such as bookkeeping or representation during audits. If you would believe you may benefit from professional assistance with your tax situation, resist the urge to try to find a competent professional on April the 14th. You may want to interview one or more candidates mid-year when there is time to find someone who is a good fit for your needs, and also to implement any end-of-year recommendations they may have. So what type of professional do you need?
A CPA (Certified Public Accountant) is qualified to prepare returns and also provide additional accounting services. CPAs have stringent education and exam requirements and are often default choice for many who seek tax services.
An EA or IRS Enrolled Agent is a tax professional who passes a challenging three-part exam and is authorized to prepare returns for clients in all 50 states as well as represent clients before the IRS.
Many attorneys also provide tax services. While some attorneys only focus on representing clients either before the IRS or in criminal matters involving tax, others do provide preparation and other services, often coupled with estate planning or legal areas related to tax.
Unenrolled agents are tax professionals who have an IRS personal taxpayer identification number (PTIN) to prepare returns but have not received one of the previously mentioned credentials. They prepare returns but do not represent clients before the IRS.
Depending on your specific situation, one of the tax professionals described may be a fit for your situation. Consider examining your options before the end of the year.
Make Your Charitable Donations
Do you have charitable interests? You may want to consider making your donations before the end of the year or even earlier if you plan to gift in installments or potentially engage in more advanced strategies.
Those who plan to give a lump sum to charity in cash should consider if they have appreciated assets (those that have increased in value) to give directly instead of the giving the same value gift as a cash contribution. This will allow you to potentially deduct the value of the gift (subject to IRS limitations) while also avoiding capital gains tax on the increased value of the asset.
Those intending to make sizable gifts may wish to speak with a financial planner and estate planning attorney prior to making their final decision to see if additional advanced strategies such as those involving trusts or the use of insurance may be appropriate. You may be able to maximize your gift to the charity of your choice while also ensuring tax advantages for yourself.
Check for Additional Deductions
This will be an important matter to consider following recent tax reform. The deductions you may have been used to taking in recent years may either no longer be available or be subject to limitations. Some deductions may still be available but with a limited impact for certain tax payers due to the increased standard deduction. Keep in mind that you can either itemize or take the standard deduction. Those whose itemized deductions fall below the standard deduction will use the standard and thus not receive an actual reduction in taxes due to their itemized deductions. Certain tax payers may choose not to engage in the activities that led to those deductions or perform the transaction in a subsequent tax year. These are good topics to address with any professional you are using for your return prior to year end.
Consider Additional Options if Self Employed
Those who are self-employed have additional items they should consider. Records of all business related expenses should be maintained and additional options should be selected for business related expenses that may be tax advantaged. If currently operating as a sole proprietor or DBA (“doing business as”) you may wish to consider the tax and other financial implications of different business structures including but not limited to corporations and limited liability companies.
Open a Retirement Account
Opening a retirement account can help your retirement savings while also receiving tax benefits along the way. There are several retirement account options, especially those for the self-employed so you’ll want to consider your options as early in the year as possible. Even though many account types allow contributions to be made by the tax filing deadline (April 15th of the following year, for example), many must be opened by the end of the calendar year. Those who are employees should ask their company benefits representative when they may start contributing to available retirement accounts or increase their existing contribution.
Purchase Health Insurance
While the recent tax reform has rescinded the individual mandate which created a tax penalty for those who did not have “creditable coverage” for the tax year, there are still tax advantages to making sure you examine all your health insurance options. You may, for example, receive a deduction for the purchase of your coverage if self-employed. Those who are purchasing an exchange plan (at www.healthcare.gov or your state’s exchange, for example) may qualify for a subsidy.
It’s also a good to consider before year end utilizing any balances that may be forgone if left in FSA (Flex Spending Account) plans. These plans may limit the balance that can be carried to a future year.
Consider Professional Guidance
As you can see, there are a lot of considerations for getting a jump on tax season, some of which affect other areas of your financial life. Consider a strategy that ties these topics together by having an assessment with a qualified financial professional.