Monday, January 4, 2016


Happy New Year!

As I usually say at this time each year – now is the time for all good taxpayers to come to the aid of their 2016 tax return.

You read it right – I said 2016 tax return, and not 2015 return

If you want to make 2016 “less taxing” it is important that you start the year off right. 

Here are a half-dozen things to do -

1) Resolve to become more informed on federal and state income tax laws. You cannot know the right moves to make in your daily financial life without a basic knowledge of the tax implications of your actions.

Learn what you can, and cannot, deduct on your tax return, including the special items that are unique to your trade or profession, and the rules governing any special situations that apply to you, and keep up to date on federal and state tax law changes. Even if you use a professional to prepare your return, the more informed you are on tax matters, the more prepared you will be when you go to your annual tax appointment.

You can keep up-to-date by becoming a regular visitor here at THE WANDERING TAX PRO.  And you can start your education, and get ready for 2015 tax return filing, with tax guides from my DOLLAR STORE.  And new homeowners can learn about the tax benefits for home ownership in my TAX GUIDE FOR NEW HOMEOWNERS.  

2)  Set up a good system for maintaining tax records and receipts. You must keep good, contemporaneous records of all your income and deductions in the manner prescribed by the IRS and the Tax Code.  Be aware that some deductions require special recordkeeping or additional information.

Go out and buy an accordion file folder.  Label the first pocket “Income Tax Returns”.  This is where you will put your copy of your federal and state income tax returns once completed.  Label the second pocket “Information Returns”.  As you begin to receive Form W-2s, 1099s, 1098s, K-1s, etc. next January and February put them in this pocket.

The remaining pockets should be labeled in the various types of deductible expenses.  During the year put acknowledgements, receipts, statements and other forms of documentation for deductible expenses in the applicable pocket.  

3) If you are planning to contribute to a traditional or Roth IRA, a Coverdell Education Savings Account, a Section 529 College Savings Plan, a Health Savings Account, or an ABLE Account for tax year 2016, do it today. 

Thanks to tax-free compounding, by making your contributions as early as possible at the beginning of each year, instead of waiting until the deadline, you will have substantially more funds in the accounts by the time you are ready to retire, or when you need the money to pay for education, medical or disability expenses.

4) Make sure, if you are financially able to do so, that you have the maximum amount set aside in your employer's 401(k), 403(b) or 457 pension plan.  And also consider contributing to a ROTH (if available) or traditional IRA.

The 2016 maximum contributions for tax-deferred pension plans are -

  IRA = $5,500
  IRA Catch-Up Contributions at age 50 and older = $1,000
  SIMPLE Plan = $12,500
  SIMPLE Catch-Up Contributions at age 50 and older = $3,000
  401(k), 403(b), 457, and federal Thrift Savings Plan = $18,000
  401(k), 403(b), 457, and federal Thrift Savings Plan Catch-Up Contributions at age 50 and older = $6,000 

For 2016, the AGI phase-out range for taxpayers making contributions to a Roth IRA is $117,000 to $132,000 for Single and Head of Household filers and $184,000 to $194,000 for Married Filing Joint and Qualifying Widow(er).  The phase-out range for a married taxpayer filing a separate return who is covered by an employer plan is $0 - $10,000.    

5) Personal credit card finance charges are not deductible, but home equity debt interest is, within certain limitations.  Plus, home equity interest rates are substantially lower than the rates charged by credit cards.  If you have excessive credit card debt, consider using a home equity loan to pay off your credit cards.  

You should be very careful when doing this.  If you make this move, monitor your subsequent credit card use to make sure you do not end up back with huge balances.  I only recommend this if you have sufficient financial discipline.  While this is solid tax advice – it could have disastrous results.

6) If you’ve changed your name in 2015 (due to marriage or divorce) be sure to change your name with the Social Security Administration before filing your 2015 tax return by submitting a Form SS-5 to request a new Social Security card.  Go to   Mismatched names and SSNs on your tax return can delay your refund. Click here to find out what to do.

And a final tip – during the year remember that the first criteria for evaluating any transaction, strategy, or technique you are considering should always be financial.  Taxes are second.  Never let the tax tail wag the economic dog.

My now standard final word of advice – before acting on anything you have read here contact your tax professional.


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