By Robyn A. Friedman
City & Shore Magazine
It’s April, and you’ve just filed your 2015 federal income tax return. Whether you did your taxes yourself or had your accountant complete them, you’re no doubt breathing a sigh of relief, thinking, “I don’t have to deal with this again until next year.”
Sorry, but no.
“The best time to start planning for next year’s taxes is right now,” says Mari Adam, a certified financial planner in Boca Raton. “Three months of this year are already over, but if you start now, you can still make an impact on next year’s tax bill.”
Experts agree that tax planning should be a year-round activity, not something that only gets your attention when April 15 looms.
“The most effective tax planning is done early in the year,” says Shomari Hearn, a vice president of Palisades Hudson Financial Group in Fort Lauderdale. “By starting early, you have a lot more options.”
Just a few of the actions to consider now:
Adjust your withholding allowances. If you had a large tax bill for 2015, reducing your allowances will allow you to better cover your 2016 liability, Hearn says. And, if your tax bill resulted from investment income instead of wages, consider making quarterly estimated tax payments to avoid underpayment penalties and interest charges in addition to a large tax payment in 2017.
If you didn’t pay much tax last year, think about doing a Roth conversion before Dec. 31. “A Roth conversion means taking money out of your IRA, basically prepaying the tax now, and then putting the money into a Roth IRA, where your funds will grow forever tax-free,” Adam says. “It’s an especially smart move if you expect your taxable income to be low this year — if your business income is low or you are taking losses for a bad investment.”
If you anticipate being in a lower tax bracket in 2016 than 2017, accelerate income into 2016 and push expenses back to next year, recommends Howard E. Hammer, an accountant with Fiske & Co. in Plantation.
Max out your retirement plans — particularly if you just had a large tax bill. Whether it’s an IRA, 401(k), Simplified Employee Pension (SEP) or SIMPLE-IRA, a retirement plan will not only benefit you in the future but will reduce your taxes now. “A solo 401(k) lets you deduct up to $53,000 from your taxable income, or $59,000 if you’re 50 or over,” Adam says. “That can save you up to $20,000 in taxes.”