Last-Minute Tax Tips to Lower Your 2016 Tax Bill
You still have time to cut your taxes — and make smart moves to lower next year's as well.
Most taxpayers approach the tax-filing deadline with a mixture of fear and loathing. But this year, there are reasons to be more sanguine. For one thing, because 2016 was an election year, Congress didn’t tinker much with the tax code. If your personal circumstances didn’t change last year, your tax bill probably won’t change much, either. And if you’re a do-it-yourself filer, you don’t have to get up to speed on a slew of new rules.
But next year could be a very different story. President Trump and Republicans in Congress want to lower tax rates for most taxpayers. To cover the cost, some popular tax breaks, such as the deductions for property taxes and state income and sales taxes, are on the chopping block. Any changes could affect your 2017 tax strategies, so stay tuned. Right now, it’s time to look back on 2016.
Because April 15 falls on a Saturday this year and April 17 is a holiday in Washington, D.C., you have until Tuesday, April 18, to file your federal tax return. That’s good news for procrastinators, but the earlier you file the better, because early filing helps thwart identity thieves. However, the IRS is on the case: In an effort to reduce tax-refund fraud, the agency will no longer allow you to request an electronic personal identification number to confirm your identity when you e-file your return. Rather, you’ll need to provide your 2015 adjusted gross income or the PIN you selected last year, plus your date of birth.
If you use the same tax software you used last year, that shouldn’t be a problem. The program will automatically transfer information from last year’s return. If you switch to a new program or use one for the first time, you’ll need to check your 2015 tax form in order to e-file. (It’s always a good idea to have last year’s tax return on hand when preparing your return, whether or not you e-file.) If you misplaced your return, you can find last year’s AGI with the IRS’s “Get Transcript” tool (www.irs.gov/individuals/get-transcript).
Here are some ways you can still trim your 2016 tax bill, plus potential speed bumps.
Contribute to an IRA. If you’re not enrolled in a 401(k) or other workplace retirement plan, you can deduct an IRA contribution of up to $5,500 ($6,500 if you’re 50 or older), no matter how high your income. You have until April 18 to make a 2016 contribution to your IRA. The IRA deduction is “above the line,” which means you can claim it even if you don’t itemize deductions. It will reduce your adjusted gross income on a dollar-for-dollar basis, which could also make you eligible for other tax breaks that are tied to AGI.
If you have a company retirement plan, you may still be eligible to deduct all of your IRA contributions. The right to the deduction phases out as 2016 AGI rises between $61,000 and $71,000 on a single return or between $98,000 and $118,000 if you’re married and file jointly.
If your spouse is covered by a workplace-based retirement plan but you are not, you can deduct your full IRA contribution as long as your joint AGI doesn’t top $184,000 for 2016. You can take a partial tax deduction if your combined income is between $184,000 and $194,000.
If you earned self-employment income last year, you have an even greater opportunity to lower your tax bill. For 2016, you can contribute up to 20% of your net self-employment income (business income minus half of your self-employment tax) to a SEP-IRA, up to a maximum of $53,000. You have until April 18 (or October 17 if you file for an extension) to set up and fund a SEP.
Fund a health savings account. You also have until April 18 to set up and fund a health savings account for 2016. To qualify, you must have had an HSA-eligible insurance policy at least since December 1. To be eligible, the policy must have had a deductible of at least $1,300 for individual coverage or $2,600 for family coverage. You can contribute up to $3,350 if you had single coverage or $6,750 if you had family coverage (you can contribute an additional $1,000 if you were 55 or older in 2016, or another $2,000 if you were married and both spouses were at least 55). As with contributions to a deductible IRA or SEP, money you invest in a health savings account will reduce your AGI dollar for dollar.
Get credit for tuition payments. The American Opportunity tax credit, worth up to $2,500 per eligible student for the first four years of college, is a valuable tax break for parents of college students. Taxpayers who claim the credit—along with those who claim other education credits, such as the Lifetime Learning credit—need a Form 1098-T from the student’s school. Schools are required to send this form to any student who paid qualified educational expenses during the tax year. You don’t need to send this document to the IRS (it will get its own copy), but you must include the school’s employer identification number on your tax return. Make sure you report the amount you paid, not the amount you were billed.
Health care housekeeping. President Trump has vowed to repeal the Affordable Care Act, but it was still in effect in 2016, so you’ll have to deal with it on your tax return. To avoid a “shared responsibility payment”—longhand for a penalty—you must prove that you had qualifying health insurance in 2016 or were eligible for an exemption.
If you had health insurance through your job, this task is easy: Simply check the “full year coverage” box on your tax return. By now you should have received a document confirming your coverage. Employees of large companies should receive a Form 1095-C; those who work for small companies, along with those who are covered by military or government insurance plans, should get a 1095-B.
If you bought health insurance through one of the exchanges set up by the Affordable Care Act, you should have received IRS Form 1095-A showing the amount of any subsidy you received. You need to file this form with your return, so if you haven’t received it, log on to your health care marketplace website and search for an electronic version.
Use the information to fill out Form 8962, which is used to determine your subsidy based on the estimate you provided of your 2016 income. If you overestimated, you’ll receive a credit to produce either a larger tax refund or smaller tax bill. If you lowballed your income, your refund will be reduced or the amount you owe will be increased to reflect the overgenerous subsidy you received.
Taxpayers who were uninsured for all or part of the year may owe a penalty. The penalty for 2016 is $695 per adult and $347.50 per child or 2.5% of household income above the income level that triggers the need to file a return, whichever is greater. (The filing threshold is $10,350 for a single person younger than 65, for example, and $20,700 for a married couple under age 65.) In any event, the penalty can’t exceed $2,676 for a single person or $13,380 for a family with five or more members. (To see what you owe, use the calculator at www.healthinsurance.org.) Before you pay, make sure you’re not eligible for an exemption. You can find a full list of exemptions at www.healthcare.gov; search for “exemption.”