Take Steps Now to Lower your 2016 Taxes

Last week’s blog was about organizing your records to save time next tax season. This week, we focus on the steps you can take now to save money next tax season.

In the next few weeks, while you have all your 2015 tax information together, take time to assess your situation and look for opportunities to lower your 2016 income taxes, increase cash flow, and build wealth. People often overlook these four steps they can take now:

Tax Withholdings

Getting a big refund? Why give Uncle Sam an interest-free loan? Get that money back in every paycheck so you can use it throughout the year. Work with your payroll office to increase your personal exemptions and your take-home pay.

Have to pay with your return? Owing a small amount is okay. Avoid underpayment penalties by withholding or paying estimates totaling the greater of either 100% of your prior-year tax liability or 80% of your current-year tax liability.


Are you maximizing pre-tax retirement benefits? Participating in employer retirement plans reduces your tax bill and saves for your retirement. Plan contributions are made pre-tax, which reduces the tax withholdings from your paycheck. The reduced tax withholding partially offsets the contribution amount.

Big bonus — plans with employer matching give you an immediate return on your investment.

Home Purchase

Should you buy a home before interest rates go up? Tax season is the perfect time to assess your home buying potential. Look at paying $1,000 a month in rent or a mortgage payment. For a taxpayer in a combined 40% marginal tax bracket where 80% of the mortgage payment is deductible interest and taxes, the after-tax cash impact of that $1,000 mortgage payment is $680.

Defer Income and Accelerate Expenses

Looking for other planning options? To the extent possible, push income into next year and pay deductible expenses this year. Expenses to consider include education, elective medical procedures not covered by insurance and capital transactions.

Investing time during this tax season to assess your situation and make some adjustments can really pay off later. Lower your 2016 income taxes, increase cash flow, and feel good about your future.

Getting Ready to File your Taxes

Well, it’s that time of year again. Holiday Season is over — Tax Season is here. Whether you engage a professional or prepare your own taxes, it’s time to start pulling together your 2015 your income and deductions.

When your records are disorganized, pulling together your tax information takes hours away from enjoying your life. Not to mention the stress it adds! Did you promise yourself last tax season to get better organized? Well, if you didn’t keep that promise before, you can keep it now by following these tips:

What to Keep

As you gather information for 2015, collect those same items regularly throughout 2016. Depending on your situation, these items include:

  • Recent year-to-date paystubs with your income and withholding information, mortgage and equity line-of-credit statements, real estate and other tax payments, unreimbursed medical expenses, and after-tax medical premiums.
  • Donations to a qualified charity made by cash, check, or payroll deduction must be acknowledged in writing. Donations of $250 or more require a detailed letter from the charity.
  • Donated clothing and household items that are in good usable condition can be deducted based on the “thrift shop” value. Donated vehicles and other items valued over $5,000 require more documentation.
  • Investment statements of your interest, dividend, and capital gains or losses year-to-date for tracking taxable income and managing capital gains and losses.

Anything new in your life for 2016? Keep these things in mind:

  • Buying or refinancing a home?

Keep your settlement statement (i.e., HUD-1) to have a record of any deductible items paid when you close on a new mortgage.

  • Household member starting college?

Keep receipts and other documents for qualified tuition and other expenses for post-secondary education. You could get a tax credit of up to $2,500, depending on your circumstances.

Keeping Your Records

Keep it simple. The goal is to substantiate the income and deductions on your income tax return.

  • Keep everything in one place and keep it up-to-date.
  • Electronic or paper records are a personal preference, as long items are substantiated.
  • Options are saving paper income statements and donation acknowledgements in a secure, fire-resistant location or scanning them to a secure electronic file.
  • Business owners and other taxpayers with more complex tax situations should consider keeping automated records, either in a spreadsheet or accounting software.

Get Reliable Help

Sure, you can probably do all this yourself. But a qualified, reliable tax professional can save you time and aggravation. Ask people you know for referrals. The IRS has a website to help at http://irs.treasury.gov/rpo/rpo.jsf. No matter what, interview at least two and make sure you feel comfortable. It’s an important relationship.

So You’ve Got a Budget – Now What?

Last week’s blog talked about building a budget you can use as a tool to grow profits and control expenses. So, you have your 2016 budget. What’s the key to turn it into an effective management tool?

The key is comparing your budget to your organization’s actual financial activities to see if budgeted financial goals are being achieved. If not, it’s an opportunity to make the necessary changes to stay on course during the year. It’s too late in December.

Following these three steps will help your organization make sure that financial goals are being met all year long:

1. Set Expectations

Responsibility and processes for comparing financial reports to the budget should be assigned and documented. Establishing expectations for financial oversight highlights the importance of this activity. Financial reports for the budget comparison should include a current month and year-to-date income statement and a balance sheet for the month-end with prior-year comparative data.

2. Take Action to Stay on Course

It’s not necessary to review every financial line item. Only significant line items and variances between budget and actual over a certain amount (e.g., +/- 10%) should be reviewed in detail. Explaining the root cause of variances often indicates the corrective action that is needed to stay on course to meet budget goals.

3. Track Progress to Achieve Results

Document the financial oversight review of budgeted and actual activity, as well as any resulting decisions and actions. Capturing the review and actions taken will help to track progress throughout the year toward meeting financial goals.

Regularly comparing the organization’s budget to actual financial activity is worth the time and effort. It helps organizations to determine whether budgeted financial goals are achieved and provides an opportunity to make any changes needed to stay on course.

Budgeting – It’s About More Than Your Cash Flow

Budgeting is often approached as a rote exercise. Take last year’s budget and add a small percentage to income and expenses, based on your best guess. Total it all up, and what have you got? Basically, you’ve got a paper with numbers on it. What you don’t have is a management tool to track and grow your business.

An effective budget helps organizations to manage day-to-day activities and long-term business objectives. Address these four budgeting priorities to gain understanding and control over your organization’s immediate and long-term needs.

1. Start with the Basics

Identify expenses necessary to operate, both in detail and by category. Use payment history, signed contracts, and other source documents to ensure that budgeted amounts are accurate. Budgeted income should be based on client agreements and other dependable information. Don’t forget amounts received or paid once a year or seasonally.

2. Plan to Stay Competitive

Think beyond the day-to-day. What investments are needed to remain effective and meet industry standards? Automation needed to keep up with your competitors? Certifications or other training required for your team? Needs too large to fund from the current operating budget require decisions about planning, postponing, or incurring debt.

3. Invest for Growth

Considering growth and other strategic objectives in the budget process promotes discussion about balancing the organization’s immediate and mid-term needs with long-term goals. Identifying all funding needs also helps with developing income targets and strategies.

4. Check your Assumptions

Be realistic when projecting future income or expenses. If you assume that income increases by 25% next year, make sure you can point to the activities or plans that make it achievable. Perform some research to verify budgeted costs, especially for new investments or anticipated savings.

Building an effective, useful budget takes time and requires serious consideration of business priorities, both short-term and long-term. But it’s worth the effort, because addressing these four budgeting priorities gives organizations a powerful tool for effective management and growth.