Three Year-End Tax Tips to Help You Save

Although the year is almost over, you still have time to take steps that can lower your  taxes. Now is a good time to prepare for the upcoming tax filing season. Taking these steps can help you save time and tax dollars. They can also help you save for retirement. Here are three year-end tips from the IRS for you to consider:

1. Start a filing system.  If you don’t have a filing system for your tax records, you should start one. It can be as simple as saving receipts in a shoebox, or more complex like creating folders or spreadsheets. It’s always a good idea to save tax-related receipts and records. Keeping good records now will save time and help you file a complete and accurate tax return next year.
2. Make Charitable Contributions.  If you plan to give to charity, consider donating before the year ends. That way you can claim your contribution as an itemized deduction for 2016. This includes donations you charge to a credit card by Dec. 31, even if you don’t pay the bill until 2014. A gift by check also counts for 2016 as long as you mail it in December. Remember that you must give to a qualified charity to claim a tax deduction. Use the IRS Select Check tool at IRS.gov to see if an organization is qualified.
   
   Make sure to save your receipts. You must have a written record for all donations of money in order to claim a deduction. Special rules apply to several types of property, including clothing or household items, cars and boats. For more about these rules see Publication 526, Charitable Contributions.
   
   Contribute to Retirement Accounts.  You need to contribute to your 401(k) or similar retirement plan by Dec. 31 to count for 2016. On the other hand, you have until April 15, 2017, to set up a new IRA or add money to an existing IRA and still have it count for 2016.
3. 
   The Saver’s Credit, also known as the Retirement Savings Contribution Credit, helps low- and moderate-income workers in two ways. It helps people save for retirement and earn a special tax credit. Eligible workers who contribute to IRAs, 401(k)s or similar workplace retirement plans can get a tax credit on their federal tax return. The maximum credit is up to $1,000, $2,000 for married couples. Other deductions and credits may reduce or eliminate the amount you can claim.

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Health Care Basics

The Affordable Care Act requires that a taxpayer and each member of their family either has qualifying health insurance coverage for each month of the year, qualifies for an exemption, or makes an individual shared responsibility payment when filing their federal income tax return. Some moderate-income taxpayers may also qualify for financial assistance to help cover the cost of health insurance purchased through the Health Insurance Marketplace. Taxpayers will fall into one or more of the following categories:

• Check the box. Most taxpayers will simply check a box on their tax return to indicate that each member of their family had qualifying health coverage for the whole year. No further action is required.

Qualifying health insurance coverage includes coverage under most, but not all, types of health care coverage plans. Taxpayers can use the chart on IRS.gov/aca to find out if their insurance counts as qualifying coverage.

• Exemptions. Taxpayers may be eligible to claim an exemption from the requirement to have coverage. Eligible taxpayers need to complete the new IRS Form 8965, Health Coverage Exemptions, and attach it to their tax return. Taxpayers must apply for some exemptions through the Health Insurance Marketplace. However, most of the exemptions are easily obtained from the IRS when filing a return.

• Individual Shared Responsibility Payment. Taxpayers who do not have qualifying coverage or an exemption for each month of the year will need to make an individual shared responsibility payment with their return for choosing not to purchase coverage. Examples and information about figuring the payment are available on the IRS Calculating the Payment page.
• Premium Tax Credit. Taxpayers who bought coverage through the Health Insurance Marketplace should receive Form 1095-A, Health Insurance Marketplace Statement, from the Marketplace by early February. This form should be saved because it has important information needed to complete a tax return. 

If the Form 1095-A is not received by early February, contact the Marketplace where coverage was purchased. Do not contact the IRS because IRS telephone assistors will not have access to this information.
Taxpayers who benefited from advance payments of the premium tax credit must file a federal income tax return. These taxpayers need to reconcile those advance payments with the amount of premium tax credit they’re entitled to based on their actual income. As a result, some people may see a smaller or larger tax refund or tax liability than they were expecting. Use IRS Form 8962, Premium Tax Credit (PTC), to calculate the premium tax credit and reconcile the credit with any advance payments.
The IRS has set up a special section at IRS.gov/aca with more information about the Affordable Care Act and the 2014 income tax return.
Alternatively, low-and moderate-income taxpayers can get help meeting this health-care requirement and filing their return for free by visiting one of the more than 12,000 community-based tax help sites staffed by more than 90,000 volunteers that participate in the Volunteer Income Tax Assistance and Tax Counseling for the Elderly (VITA/TCE) programs. To find the nearest site, use the VITA/TCE Site Locator on IRS.gov.

The IRS urges all taxpayers, especially those claiming the premium tax credit, to make sure they have all their year-end statements in hand before they file their return. This includes Forms W-2 from employers, Forms 1099 from banks and other payers, and, for those claiming the premium tax credit, and Form 1095-A from the Marketplace. Doing so will help avoid refund delays and the need to file an amended return later.

Filed an Extension?

Now that you've filed an extension, let's break the tax preparation process into two parts: what must be done by 4/15 and what can be done after 4/15.

Are there any actions that a person can take by April 15th to reduce the amount of tax?Yes. Depending on what makes sense for your situation:

• Contribute savings to a traditional IRA and/or Roth IRA. Implication: figure out if you'll be able to deduct traditional IRA contributions or not; figure out if you're eligible to fund a Roth IRA or not; figure out if either of these makes sense for your situation.
• Contribute savings to a health savings account. Implication: figure out how much you can contribute and if this strategy makes sense for your situation.
• Donate to a charity providing relief to people impacted by Typhoon Haiyan. Donations made by 4/14 can be deducted on your 2013 return under a newly passed law.

Are there any actions that can wait until after 4/15 and before 10/15?

• Contributing savings to a SEP IRA or solo 401(k) if you're self-employed.
• Reviewing and finalizing your tax return.

Courtesy: William Perez, About.com