Your income tax obligation needs to be on your mind year-round. Here are some ways you can get a jump on your 2017 taxes.
Summer’s over. Kids are back in school. And soon, there’ll be only three months left in 2017. If you haven’t started thinking about how to minimize your income tax obligation for this year, there’s still time.
Whether you’re a small business or an individual taxpayer, year-round tax planning is more than just a way to make tax preparation an easier, faster process. By keeping taxes in mind as you go through every 12-month period, you’ll be able to see where you might take specific actions early that will have impact on what you end up owing. Make it a habit, and you’ll find that it just comes naturally to consider the tax implications of purchase and sales decisions.
Create a System
Effective tax planning requires more than just saving receipts and organizing tax-related documents in physical or digital file folders – though that’s a good start. Create a system in early January that you can maintain throughout the year (of course, a lot of your information will be stored in your accounting or personal finance application, if you use one). But you should be saving statements, receipts, sales forms – anything related to your income and expenses that will eventually feed into IRS forms or schedules.
Evaluate Your Expense-Tracking
Businesses: How do you—and your employees, if you have them—keep track of daily expenses? You may have forms like purchase orders and bills for the big ones, but you probably buy things on occasion that are just documented by paper receipts. How do you categorize and organize these so you won’t miss any when it’s time to complete a Schedule C? Is there a better way?
Do any of your employees make trips on behalf of your business? You may want to consider subscribing to an online service that automates the process of creating and approving expense reports.
Know Your Tax Forms
Individuals and businesses file some of the same forms and schedules, but some, of course, are different. Your previous years’ tax returns can be good resources for you. Refer to them occasionally as you go through the year and do some comparing, especially if you must pay quarterly estimated taxes. You may not remember from year to year what’s deductible and what’s not. Revisiting your returns will jog your memory and remind you.
Are you having a good year? You’ll have an idea of how your financial health is if you’re keeping up with income and expenses. You don’t have to wait until the end of the year to do any charitable giving that you’re going to do. If you have been wanting to make a donation to help recent disaster victims, now is a great time to evaluate where you are at for taxes. If you itemize, making an extra donation now may save you significantly on taxes come April when you file your return.
Learn How Changes Will Affect Your Taxes
This is so important for individual taxpayers. Did you get married or divorced, or have a child? Did you move? Buy or sell a home? Get a raise or, conversely, lose regular income for some reason? Did you have educational expenses? All these life events—and more—can change your income tax obligation.
Businesses often experience major changes, too, and your financial state at the end of the year is way harder to predict than it is for an individual with W-2 income. Stay on top of the impact of deviations in income and expenses created by events like the introduction of new products (or the loss of existing ones), personnel fluctuations, and major acquisitions.
Tax planning should be an element of your overall financial planning. If you have a business or household budget, you’re way ahead of the game. You can compare your actual income and expenses every month to those you built into your budget. A budget can be a tremendous tool as you plan for the current year’s taxes. If you’ve never created one, or if you’ve never stuck to one successfully, see these prior posts to get started (here, here, here, here, and here!)
The best time to plan for taxes is in the fall when you still have the opportunity to make changes. Too many people wait until after the year ends to gather their information and figure out what they are going to owe (or get back). The problem with this method is that at that point it is too late to change anything. Taking a little bit of time each year to look at where you are before year end will give you the opportunity to make changes along the way, and if necessary consult with a tax professional who can help you maximize your tax planning even further. Surprises are only fun on special occasions; taking ownership of your tax situation now will help avoid unpleasant tax surprises in the future.