The IRS will start accepting 2016 tax returns from 23rd January onward. Amongst the various tax points to keep in mind this tax season, here are a few important things to do before the U.S. Tax Filing Season.
Maximize Your IRA and/or 401(k) Contributions
Workplace contributions for the tax year 2016 must be made before December 31. The maximum contribution limit for 401(k), and other such qualified retirement accounts is $18,000. Contributions to the traditional IRA and ROTH IRA may be made up to April 18, 2017. The contribution limit is $5,500 ($6,500 if the taxpayer is aged 50 or older). Depending on the amount of wages a taxpayer earns, taxpayers can make the maximum contribution toward their qualified retirement plan to reduce their taxable income, if you still haven’t maximized your retirement contribution limit, consider doing so to reduce your taxable income.
Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan).
Taxpayers who are over age 70 ½ are generally required to receive payments from their individual retirement accounts and workplace retirement plans by the end of 2016, though a special rule allows those who reached 70 ½ in 2016 to wait until April 1, 2017 to receive them. RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.
Plan Now to Get Full Benefit of Saver’s Tax Credit
Low and Moderate-Income Workers can benefit from the ‘Saver’s Tax Credit’, which like any other credit can result in a tax refund or reduce the tax liability. The IRS recommends qualifying taxpayers to take full advantage of this tax credit for 2016 and beyond.
The saver’s credit can help offset part of the first $2,000 contributed voluntarily toward an IRA, 401(k), 403(b) or other qualifying workplace retirement plan. This tax credit is available in addition to any other tax savings that may apply. A credit is available for up to 50% of the contribution depending upon the taxpayer’s filing status and amount of income.
The saver’s credit can be claimed by:
- Married couples filing jointly with incomes up to $61,500 in 2016 or $62,000 in 2017;
- Heads of Household with incomes up to $46,125 in 2016 or $46,500 in 2017; and
- Married individuals filing separately and singles with incomes up to $30,750 in 2016 or $31,000 in 2017.
Update the IRS about Any Personal Information Changes
It is important that taxpayers update the U.S. Internal Revenue Service (IRS) regarding any changes to their address due to relocation, change in last name or other changes due to marriage or any tax changes due to divorce, change in filing status or other such information to the IRS, before they start working on their tax return. This is necessary since any discrepancy in information may lead to delay in processing the tax return which could further lead to delay in any expected tax refund.
Depending upon the change, the Social Security Administration, US Postal service or other such associated government organizations need to be informed as well.
Notify the Health Insurance Marketplace & IRS
Most U.S. taxpayers are required to have the minimum health insurance coverage for themselves and dependents under the ‘Individual Mandate’ rule of Obamacare. Taxpayers, who have recently purchased their health insurance coverage through the Health Insurance Marketplace or moved out of the area covered by their current Marketplace plan should inform the IRS and Marketplace about these changes at the earliest to avoid any adverse tax situations. If a taxpayer qualifies for exemption from the minimum required health coverage rule, he/she should also officially complete the IRS forms associated with claiming the exemption.
Check Individual Taxpayer Identification Number (ITIN) Expiration Date & Renew
Individual Taxpayer Identification Numbers (ITIN) that have not been used to file a U.S. income tax return in the last three consecutive years are considered expired ITINs. Taxpayers should apply for a renewal of their U.S. ITIN if it has expired before the 2017 tax filing season begins. U.S. taxpayers residing in foreign countries can reach out to designated authorities in their resident countries for ITIN renewal.
Taxpayers need to send a completed Form W-7 to the IRS for ITIN renewal. Not renewing the ITIN before tax filing could lead to a delay in processing the filed tax return, and associated refund(s).
Obtain Bills or Other Payment Slips
All qualifying expenses, such as: medical, charitable deductions, state income taxes, etc. qualify for tax deduction in 2016 tax filing only if they are paid within the January 1, 2016 to December 31st, 2016 period. If you still haven’t made any charitable contributions or have some medicines to purchase, consider doing so by the 31st of December, 2016 to claim the expense on the annual income tax return. Having said that, the actual payment can be made on a later date in 2017. For example if a donation is made to a qualifying charity by credit card in December and the credit card bill statement is generated in January, 2017, the charitable contribution/donation will still qualify as a tax deduction for the tax return filed for year 2016.
Eliminate Exposure to Net Investment Income Tax (NIIT)
The net investment income tax is a tax of 3.8% that applies to investment income that exceeds a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). Investment income includes gross income from interest, dividends, capital gains, annuities, royalties, and rents, To eliminate exposure to the NIIT, the taxpayer should determine both his/her adjusted gross income and net investment income. Once determined, the individual can either
- Reduce his/her net investment income by accelerating investment expense deductions, using capital losses to offset capital gains or
- Reduce his/her adjusted gross income below the threshold amount.
Obtain Foreign Accounts Statements & Foreign Assets Value
The U.S. Internal Revenue Services requires qualifying U.S. taxpayers to file certain additional tax forms reporting the highest value in foreign accounts or the value of their other foreign assets. Therefore, it is advisable to store year-end documents when they arrive so they are handy when it is time for reporting the account and asset values on forms, such as: FBAR, Form 8938, Form 8621, etc.
Check Your W-2 and 1099 Information Forms
The deadline for employers to provide Form W-2 and Form 1099-Misc and other 1099 forms to employees are early by a month, reach out to your employer if there is any delay. Though these documents ease the tax filing process, it will not impact your tax filing process. Additionally, to avoid identity theft and usage of fake W-2s for false refund claims the IRS has added a new 16-character verification code to the W-2 form. This identity verification measure was executed as a pilot program for some W-2s, therefore check whether your W-2 has this 16-character code and avoid disclosing it unnecessarily.
Maintain Copies of Recent Tax Returns
The IRS is taking every measure to avoid identity thefts and false refund claims. One of the steps involved is comparing the data with previous years’ tax filings. For example: beginning in 2017, taxpayers using a tax filing software for the first time, may need to state their ‘Adjusted Gross Income’ (AGI) from their previous year’s tax return to validate their identity Therefore, it is highly recommended that U.S. taxpayers keep copies of their previous years’ tax returns, just in case it is required to authenticate their identity. Taxpayers who have been e-filing need not worry as they can use the ‘Get Transcript’ tool on IRS.gov website to request a free transcript for the past three tax years.
Make Gifts Before The End of The Year
As an individual can’t carry over unused gift tax exclusions from one year to the next, it is advisable to make gifts that may be sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and/or estate taxes in the future. The annual exclusion applies to gifts of up to $14,000 made in 2016 and 2017 to each of an unlimited number of individuals.
These are some of the key points to keep in mind as they can help reduce the income subject to taxes, and validate the tax return to ensure smooth processing of the filed tax return. As a good tax practice, it is suggested that taxpayers should maintain a checklist of the documents required for them to claim tax deductions and tax credits and support their reported income amounts. These documents should be maintained in a physical or desktop folder and the checklist updated accordingly.
Nonetheless, if you have a complex tax situation involving several information returns, and tax forms, it is highly recommended to reach out to a tax professional to ensure correct, complete, and tax-compliant tax filing.
AG TAX LLP CAN HELP
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- US Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
