WASHINGTON — Tax season is coming up, and it isn’t expected to be an easy one.
For the first time, people will have to report their health insurance status on their tax returns. As it happens every couple of years, there are a slew of tax breaks that will go away next year if Congress doesn’t act to renew them.
Most taxpayers prefer to have someone else handle the math and the paperwork. But even if you’re working with a pro, there are things you should get in line now to minimize your tax hit, and maximize your refund, come April.
1. Estimate your tax bill. Your accountant might help you do this, but if you don’t have one, you can use online estimators offered by tax preparation companies like TurboTax and H&R Block. This way you’ll know to start saving now if you have a big tax bill due in April, says Melissa Labant, tax specialist at the American Institute of CPAs.
2. Max out your retirement accounts. An easy way to lower your tax bill is to put more money into a tax-deferred retirement account. You might be able to contribute a little more than usual into your 401(k) in December than you did in earlier months, as long as you aren’t going over the annual contribution limit of $17,500. Savers can make IRA contributions for this year up until April 15, but they may not be deductible.
3. Write off your investment losses. This year is turning out to be a pretty good one for stocks so far, but that doesn’t mean that all stocks are gaining. If you are planning to sell some stocks that have gained in value, you may also want to sell shares that have dropped in price so that you can offset those gains, Labant says. You can then write off an additional $3,000 in investment losses to offset your taxable income.
4. Give more to charity. If you have a cause you care about, the end of the year can be a good time to make another donation, says Sara Montgomery, philanthropic services specialists for Wells Fargo Private Bank. If you’ve also estimated your tax bill, you might have a sense of whether giving a little more might make a difference on your tax return.
5. Prepay some expenses. Some people might get more out of certain tax deductions by prepaying some of next year’s expenses. For instance, if you pay January’s mortgage payment in December, you can increase the size of your mortgage interest deduction. The same goes for prepaying medical bills and prescriptions if you’re planning to deduct medical expenses. But don’t forget to keep next year in mind, warns Jackie Perlman, principal tax research analyst at the H&R Block Tax Institute. If you got a promotion and a raise at the end of the year, it might be better to save those bigger deductions for next year when you could face a bigger tax bill, Perlman says.
6. Check your health insurance. People who bought health insurance on the new state and federal insurance exchanges will receive a new tax form this year called the 1095-A. These forms should lay out how much a person paid in premiums and if they received a subsidy tax credit to help lower insurance costs. People who didn’t have insurance this year will need to pay a penalty or show that they were exempt from having coverage this year.
7. Max out pre-tax accounts. At this point, you might be rushing to spend down the remaining cash in your health flexible spending account. For a health savings account, which can get rolled over from one year to the next, you might want to make a last-minute contribution this year as a way to reduce your taxable income. And adjusting how much you put into the account next year could lead to hundreds, if not thousands of dollars in tax savings.
