Have you heard the saying the early bird gets the worm? When it comes to your tax filing, failing to plan can be expensive. The early bird doesn’t just file tax returns on time; he or she plans for tax time well in advance. Tax preparation is what sets you up for optimum success. The more you work with your tax planning professional the more you are able to take advantage of all available deductions and incentives. The first step in efficient tax planning is to regularly communicate with your tax planning professional and get started early. Every person’s situation is unique and your tax professional will know exactly what information is needed to get your tax strategy implemented prior to the actual filing. Here is a Scottsdale lawyer’s tax planning guide of things you can do and items you can gather to get you started:
- Get organized (if you aren’t already). You will want all your paperwork and statements accessible in one safe place. Try to put all pertinent documents together, such as your W2’s, 1099’s, interest statements, and the items listed below, preferably in a fire proof safe. This will make it much easier to find everything when it is time to visit your tax professional.
- Your mortgage statement. According to the IRS “You can deduct home mortgage interest if all the following conditions are met.
- You file Form 1040 and itemize deductions on Schedule A (Form 1040).
- The mortgage is a secured debt on a qualified home in which you have an ownership interest.”
Second homes and home equity loans may also qualify for the mortgage interest deduction. Second homes are eligible provided they are not classified as rental homes and home equity debt may qualify for the mortgage interest deduction with limitations.
- Charitable donation receipts. Charitable donations are only deductible if you itemize on the 1040. Charitable donations must be made to qualifying organizations to qualify for the deduction and you must retain a record of the donation such as a receipt or acknowledgment letter. There are various IRS forms that will need to be filled out depending on the type and amount of your donation. Keep meticulous records and receipts of all charitable giving.
- Healthcare: proof of coverage and expenses. For 2015, the IRS has created three different information forms relating to your healthcare coverage. You will determine which form to use based on how you obtained healthcare coverage for the year. If you obtained healthcare through the Marketplace you may be eligible for a premium tax credit and should receive a form 1095-A. While the IRS does not require you to send proof of your healthcare coverage with your return, you should keep these records on file and provide them to your tax planning professional in case of an audit down the road.
You may also want to calculate your medical expenses for the year. Your medical and dental expenses may be tax deductible. The IRS stipulates that you must itemize in order to take the deduction and you can only deduct expenses over 10% of your adjusted gross income, (7.5% for certain tax payers). Work with your tax planning professional to determine if your medical expenditures meet the minimum IRS requirements.
- Mileage documentation: Mileage deductions can be taken but you must have carefully documented records. Miles for business, charity or medical purposes may be deductible. The news is even better if you are self-employed. According to usnews.com “For 2016 tax filings, the self-employed can claim a 54 cent deduction per business mile. Those miles could be racked up from meetings with clients, travel to secondary work sites or errands to pick up supplies. “You may be going to Office Max to buy paper for your printer,” Dietrich says, “or scouting out locations for a photography shoot.” Unlike some of the other mileage deductions available, mileage for self-employed workers isn’t subject to any threshold requirements. In other words, all miles are deductible regardless of how much a person drives for work.”
- Business reports and deductions. The list of possible business deductions is extensive. In a perfect world you have already consulted with your tax planning professional in order to establish your business entity and strategize for your taxes. It is helpful to submit your profit and loss statement and balance sheet to your tax planning professional so that he or she can confirm you have allocated and categorized your books correctly.
According to the IRS business expenses may be deductible if they are ordinary and necessary. “It is important to separate business expenses from the following expenses:
- The expenses used to figure the cost of goods sold,
- Capital Expenses, and
- Personal Expenses.”
Other possible business deductions include automobile expenses, employee gifts, startup costs, legal and professional fees, home office expenses and furniture and equipment costs and depreciation. Each of these deductions has specific criteria, established by the IRS, which must be met. For your protection, you should always keep receipts and records in the event of an audit.
- Most recent account statements. Your most current account statements will give your tax professional valuable information. These statements will help determine if you have maxed out your 401k contributions. The statements will also reflect any required minimum distributions (RMD’s) if you are 70 1/2 or older.
Every person’s finances are unique and need specific and detailed planning. This Scottsdale lawyer’s tax planning guide should give you a good starting place. The best strategy you can have when tax planning is to partner with a tax planning professional. Together you can map out your tax savings strategy and put as much of your hard earned money as possible where it belongs; back in your pocket.