Tax Planning

Seriously, the best time to start on 2016 taxes is now

Preparing for next year's taxes
Preparing for next year's taxes

Now that tax year 2015 is in the rearview mirror, it's time to turn your attention to the return you'll be filing next year.

Experts say most consumers' efforts to minimize their bill are too little, too late.

"Tax planning is more about whittling over time than grand gestures at the last minute," said certified financial planner Lynn Ballou, a regional director with EP Wealth Advisors. "It's a very complicated dance."

By IRS estimates, the average Form 1040 filer spends just two hours per season on tax planning. To put this in perspective, they expect you'll spend four times that on record keeping (i.e., sorting through that shoebox full of receipts) and twice that to actually prepare and submit your return.

One of the first places to mine for tax moves is your latest return, said Melissa Labant, director of tax advocacy for the American Institute of Certified Public Accountants. Start with the big picture – did you have an outsize refund or bill? Consider adjusting your tax withholding or estimated tax payments.

"The idea is to come close to breaking even," she said.

A more detailed line-by-line review on your own or with the help of your tax preparer can help highlight other action items, Ballou said. Maybe you didn't get the full value of certain credits or deductions, for example, or could have pushed yourself into a lower bracket by contributing a little more to your 401(k) plan.

Consumers subject to the alternative minimum tax might see red flags in retrospect, like high state and local taxes or capital gains that exceed your earned income, said Greg Rosica, contributing author to Ernst & Young's EY Tax Guide 2016. "If you're subject to it, make sure you understand why you're subject to it," he said – which can help you decide the best ways to avoid or minimize AMT impact in future years.

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Once you've combed through last year's return, turn an eye to this year's possibilities. Many strategies take time to think through or are best acted on early.

"I would do [tax-loss harvesting] sooner rather than later," Ballou said.

Taxpayers can use that strategy to zero out any capital gains incurred, and can then deduct up to an additional $3,000 in capital losses against other income for that year. But it's better for your portfolio to start looking for and weeding out losers before the end of the year is looming, she said.

Early tracking of deductible expenses can help ensure you're making the most of certain tax breaks, especially those that have thresholds or are limited based on your adjusted gross income, said Rosica.

For example, knowing how close you are to the 10 percent threshold on medical and dental expenses (7.5 percent if you or your spouse is 65 or older) might influence whether you defer or accelerate treatments at the end of the year.

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Pre-planning also allows for easier bunching of deductible expenses like charitable donations or real estate taxes. "That can bridge two different tax years," Rosica explained.

The net effect is that you could alternate claiming the standard deductions and itemized deductions, netting bigger breaks. Or if you are subject to the AMT, he said, bunching might mean you only have to face it every other year.

While you're thinking ahead to next year, cut some of your tax prep pain by getting more organized. "Have one spot for all of your tax records," said Labant. Make a note of deductible expenses, charitable donations and other relevant tax info so you aren't combing through receipts and credit card statements next year when the details aren't as fresh.