The First Thing Tax­pay­ers Should Do In 2017

ForbesWeekly - - NEWS - BY KELLY PHILLIPS ERB, FORBES STAFF FOL­LOW KELLY PHILLIPS ERB AT http://www.forbes.com/sites/kel­lyphillipserb

As we swing into the new year, it’s easy to for­get about taxes and tax plan­ning. April 18 (re­mem­ber, you get a few ex­tra days to file this year) seems a long way off and tax­pay­ers typ­i­cally get busy with fam­ily and work in the new year and don’t think about taxes. It’s un­der­stand­able.

But there’s one thing you need to do in 2017 to en­sure a smooth fil­ing sea­son, and it’s su­per easy: Buy a new ledger; flip over a new page in your ex­penses notebook; or en­ter your fi­nan­cial trans­ac­tions in your 2017 ac­count­ing soft­ware. What­ever sys­tem you use, fin­ish off your 2016 en­tries now and start 2017 fresh. And do it now, not at the end of the month. Or the end of next month. Here’s why. All of that plan­ning that you’ve been read­ing about for weeks now? Tim­ing your char­i­ta­ble de­duc­tions? Pre­pay­ing your mort­gage? Pay­ing your med­i­cal ex­penses by year end?

It all tends to be for­got­ten by tax time. And tax­pay­ers who sim­ply rely on fi­nan­cial and bank state­ments con­sis­tently get it wrong. That’s be­cause fi­nan­cial and bank state­ments pro­vided by third par­ties—like your bank or bro­ker—will ev­i­dence your trans­ac­tions when they are recorded or cleared, not when you made or ini­ti­ated them. That means that the check that you wrote on De­cem­ber 30, 2016 may show up on your bank state­ment as a Jan­uary 4, 2017 trans­ac­tion. Those few days make a huge dif­fer­ence when it comes to in­come and ex­penses for tax rea­sons. And if a small busi­ness or other com­pany is closed for the hol­i­days or holds onto your pay­ment for a while, it could be weeks be­fore the trans­ac­tion is ac­tu­ally recorded.

That means when you pull out your De­cem­ber state­ments in April to fig­ure out what might be de­ductible, you lose the ben­e­fit of any plan­ning you did that doesn’t show up on that state­ment. But you’re still en­ti­tled to the de­duc­tion when made, so if you get the dates wrong, that mistake will cost you. It could re­sult in hun­dreds, or in some cases, thou­sands of dol­lars in missed de­duc­tions. Ouch, right?

Here are the rules on tim­ing. In most cases, in­come is tax­able when re­ceived or made avail­able to you (you can’t just hide that check in a drawer and de­fer it to the fol­low­ing year). Ex­penses are typ­i­cally de­ductible when paid, mean­ing when the check is in the mail or when you make the charge.

That’s why it’s im­por­tant to get it right the first time. Keep­ing ac­cu­rate, con­tem­po­ra­ne­ous records is your best bet.

So no more guess­work or fudg­ing come April. No more fu­ri­ously dig­ging up credit card re­ceipts and old check­books. No more rack­ing your brain to try and re­mem­ber when you paid your hos­pi­tal bill or made a do­na­tion to charity. Start the year off right and tax time will be a breeze.

*One quick caveat: I’m fo­cus­ing on cash-based tax­pay­ers since the ma­jor­ity of in­di­vid­ual tax­pay­ers are on a cash-based sys­tem. If you’re an ac­crual-based tax­payer, con­sult with your tax pro­fes­sional for more in­for­ma­tion on tim­ing in­come and ex­penses.

SHUTTERSTOCK

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