Before you file, remember to:
✔ Take advantage of deductions.
✔ Ask for an extension if you need one.
✔ Be prepared to pay what you owe, even if you file for an extension.
✔ Have your 2015 adjusted gross income handy if you’re e-filing.
If you haven’t done your 2016 taxes yet, you’re not alone. More than a fifth of all taxpayers wait until the last two weeks before the mid-April deadline to file their returns, according to the IRS. And you have three extra days this year. The filing deadline is April 18, not the traditional April 15.
If you find yourself staring down the deadline again this year, here are nine tips that might help make the task go a little more smoothly.
|1.||See whether you can lower your taxable income.|
It’s been months since you earned your last dollar of 2016, but you may still be able to reduce your taxable income. A traditional IRA contribution can reduce taxable income and, in turn, 2016 taxes for those eligible for the tax deduction.1 Alimony is also considered income, so a nonworking person receiving alimony may also be able to contribute to a traditional IRA. The tax-deductible contribution limit for the 2016 tax year is $5,500. For those who are age 50 and over, the limit is $6,500, and you have until April 18, 2017, to open and contribute to an IRA.
Self-employed individuals and freelancers can open a Simplified Employee Pension plan—more commonly known as a SEP IRA—even if they have a full-time job as an employee. If you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits from your side gig. With a SEP IRA, contributions may be tax deductible, just like with a traditional IRA, but the SEP IRA has a much higher contribution limit. The contribution amount varies based on income. For 2016, the contribution limit is 25% of pretax income (20% for the self-employed) or $53,000, whichever is lower. The deadline for 2016 contributions is the tax deadline—April 18, 2017.
For more information, visit the IRS’s Retirement Saving Tips for Individuals.
|2.||Gather and review paperwork.|
Review bank statements, year-end investment reports, checkbook registers, credit card statements, and the “statement of benefits” from your health insurance company to see whether there are deduction opportunities. A review of your 2015 tax return can help remind you of what you typically deduct. Check all tax forms from your bank, mortgage provider, and financial services provider. If you have student loans—for you or your children—make sure you have the related tax forms for deductible interest.
Read Viewpoints “Tips for deducting more at tax time.”
Filing your tax return electronically is faster, easier, and less prone to errors. You can access the IRS’s e-file service using commercial software, through a professional tax preparer, or directly through the IRS. If you choose to e-file, be aware that you might be asked to enter the adjusted gross income amount from your 2015 tax return to verify your identity. It’s part of the IRS’s initiative to increase security.
|4.||File even if you can’t pay.|
Filing a tax return on time and paying less than you owe isn’t nearly as costly as not filing at all. In fact, the penalty for not filing a tax return could be as much as 10 times greater than the penalty for not paying in full, according to the IRS. The late-filing penalty is 5% of the unpaid tax amount for every month your return is late, up to a maximum of 25%. If you file more than 60 days after the due date, the minimum penalty is $135 or 100% of your unpaid tax, whichever is less. On the other hand, if you file a return but don’t pay all that you owe, the late-payment penalty is 0.5% of the tax owed for every month, up to a maximum of 25%. The late-payment penalty is waived for months in which you also owe the late-filing penalty.
|5.||File an extension if you’re not ready.|
If you don’t have complete information or simply need more time to prepare your return by the April deadline, you can get a six-month extension. But keep in mind that the extension to file is not an extension to pay. You still have to send the IRS the amount of tax you owe by April 18 or face a late-payment penalty. If you choose to get an extension, you can fill out and submit Form 4868, or you can get an automatic extension by estimating your tax liability and making an electronic payment using IRS Free File. You can also request an extension when making a payment through the IRS’s Direct Pay or Electronic Federal Tax Payment System.
|6.||Act quickly if you suspect you’re a victim of fraud.|
One of the biggest reasons the IRS recommends that you file your taxes early is to help protect yourself from tax fraud. A common tactic used by thieves is to a file a fraudulent tax return under a stolen identity and collect a refund. If you file your legitimate return and receive a notice that a return has already been processed under your Social Security number, complete IRS Form 14039, Identity Theft Affidavit, attach it to a printed copy of your return, and mail it to the IRS. Also, file an identity theft complaint at IdentityTheft.gov, and contact one of the three major credit bureaus to place a fraud alert on your credit records. You should also contact your financial institutions and alert them to the situation. For more information, read Viewpoints “Don’t fall prey to financial scams.”
|7.||Comply with the Affordable Care Act.|
You probably have heard a lot of speculation about the future of the Affordable Care Act and the law’s “individual mandate,” which requires Americans to have qualified health insurance or pay a penalty to the IRS with their tax return. While the law may change in the future, it was still in force in 2016. If you didn’t have the required health coverage last year, you could be in violation of the law if you choose not to pay the penalty and take the chance that the IRS won’t enforce it.
|8.||Suggest working kids file a return.|
Many people who don’t meet the general requirements for having to file a tax return and don’t think they owe income tax are inclined not to bother filing. But it might be a good idea anyway. For example, young people who worked over the summer or after school might have had taxes withheld from their pay. If they don’t file a return, they won’t get a refund. Also, you need to file a return to receive “refundable” tax credits, such as the earned income credit, the additional child tax credit, or the American opportunity tax credit.
|9.||Make adjustments if you’re due a refund.|
A refund from the IRS isn’t a gift from the government, it’s a gift you gave the government. A tax refund is essentially an interest-free loan you extended to the IRS that is now being returned to you. A large refund is probably an indication that you’re having too much tax withheld from your paycheck. If so, tell your employer you would like to revise form W-4, and use the IRS’s withholding calculator as the starting point for making an adjustment.
When your 2016 tax return is finally complete and submitted, don’t simply file it away and forget it. Just as a large refund is an indication that you might be having too much withheld, other clues in your return can show you where smarter tax strategies might lower your taxes in 2017 and beyond.
- Read Viewpoints: "Answers to top five tax-form questions."
- Get your tax information.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
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