5 Tax Moves You Need to Make in January
Now that the new year is well under way, it's time to take stock of your finances and set yourself up for a successful 2017. Here are five strategic tax moves you'll want to make sooner rather than later.
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1. Sign up for your employer's 401(k)
It's estimated that 57% of workers have access to an employer-sponsored 401(k),yet 68% of Americans don't participate in one.If your company offers a 401(k), now's the time to sign up and start building your nest egg. Anyone under 50 can contribute up to $18,000 this year, and if you're 50 or older, you're allowed a $6,000 catch-up for a total of $24,000. While most workers can't afford to max out on these limits, you should aim to set aside 10% of each paycheck if you can swing it. If not, be sure to contribute enough to fully capitalize on whatever matching incentive your company offers. A good 25% of workers pass up a whopping $24 billion each year in unclaimed matching dollars, so at the very least, kick in enough to get your hands on whatever free money your employer is willing to give you.
2. Open or fund your IRA
If you don't have access to an employer-sponsored retirement plan, your next best bet is to open an IRA, or, if you've already done so, contribute as much as you can to it. While IRAs have lower contribution limits than 401(k)s -- $5,500 a year for workers under 50 and $6,500 for those 50 and older -- they can still be powerful tools for helping you reach your retirement goals. While you have plenty of time to fund your IRA for the 2017 tax year, what you should really focus on now is boosting your 2016 contribution if you haven't maxed it out already. You have until April 18 (the 2017 tax filing deadline) to make a contribution that counts retroactively toward the 2016 tax year, so don't pass up the opportunity to cut your tax bill this spring.
3. Adjust your withholding
If you're a salaried worker, your company is required to withhold a portion of your paychecks for tax purposes. But getting that withholding amount right can be tricky. While getting a huge refund might seem like a good thing, in reality, all it means is that you gave the government a tax-free loan and got nothing in return. On the other hand, if you owe the IRS a lot when you submit your return, consider increasing your withholding so you're not faced with a large bill -- or a penalty -- the next time around.
4. Look out for 1099s
If you're a salaried employee, you probably know to look out for your W-2 around now, but you should also keep your eyes peeled for 1099 forms. Ideally, 1099 forms should be sent out by Jan. 31, though some companies and entities push that limit a bit. Make sure to file those forms away in a safe place and keep track of which you've received and which you haven't. If, for example, you're a freelancer who did work for a number of different companies, you'll want to make sure you have all of your documents in place with enough time to file your upcoming tax return. The sooner you realize you're missing certain forms, the more time you'll have to reach out and follow up so you're not stressed come April.
5. Prepare your tax return early
Though you have until April 18 to file your 2016 taxes, now is actually the perfect time to put your return together. If you're due a refund and submit your return early, you might get your hands on that money sooner.
That said, if you're among the millions of Americans who claim the Earned Income Tax Credit or Additional Child Tax Credit, you won't receive your refund prior to Feb. 15 this year. Thanks to the recently passed PATH Act, the IRS is ramping up its efforts to prevent tax fraud, and part of that involves delaying refunds under these two credits, which happen to be refundable. In fact, it's estimated that more than 40 million low-income families will have their refunds delayed this year.
Another thing to think about is that if you prepare your return and find that you owe the IRS some money, you'll have several months to save so you're able to cover that tax bill in full and avoid a late-payment penalty. If you've underpaid on your tax withholding, but wait until the filing deadline to figure that out, you may have a harder time coming up with the cash.
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