Insurance agents can save with these 2016 tax tips and deductions

Insurance agents, you have exactly 14 days before your taxes are due. Whether you’re nearly finished or just beginning your tax preparation, these 2016 tax tips can help you find ways to save.

1. Get organized.

This one’s a no-brainer, that’s true. But how many times, after you’ve finished your taxes at the eleventh hour, have you vowed that next year, you’ll be more organized? One tip is to keep a photo file on your smart phone of any documents, receipts, etc. that you’ll need for taxes. When that item comes in the mail, or you have the receipt in hand, just shoot an image and file it away on your phone. Then periodically back up your phone’s photos so that you don’t lose anything. While this doesn’t negate the need to keep hard copies, at least you’ll know what the document looks like when you begin searching for it.

Related: 2016 Year-end tax strategies for insurance producers

Another idea is to download a tax prep checklist. There are several online; here’s one from TurboTax to help you organize all your paperwork.

2. Determine if you need to adjust withholding.

While admittedly this won’t help you with 2016 taxes, it can help significantly next year. By looking at what you made and what you owe for last year, you can see if you’re overpaying or underpaying by a considerable amount. You’ll need to complete the form W-4, Employee’s Withholding Allowance Certificate, to adjust the amount withheld, and turn in to your HR group.

3. Claim your dependents. 

TurboTax says some tax filers try to claim their children as dependents without including their social security numbers. It won’t work. Failure to add your kids' social security numbers on tax forms will cause the IRS to deny the personal exemption of $4,050 in 2016 for each dependent and the $1,000 child tax credit for each child under age 17. (Note: The $1,000 child tax credit begins to phase out at $110,000 for married couples filing jointly and at $75,000 for heads of households.)

Be careful if you are divorced, because only one of you can claim your child as a dependent. TurboTax says the IRS has been checking closely lately to make sure spouses aren’t both using their children as a deduction. If you forget to include your children’s social security numbers, or if you and your ex-spouse both claim the same child, you will most likely halt the processing of your return (and any refund you’re expecting) until the IRS contacts you for clarification and proof.

Be sure to file for your brand-new baby’s social security card right away so you have the number ready at tax time. Many hospitals will do this automatically for you. Rather than filing your return without the baby’s social security number because you don’t have it by the deadline, the IRS says it’s best file for an extension.  

4. Maximize your retirement plan contributions.

You have until April 17 to fund your IRA for 2016. In working with your tax preparer, you may ask him or her to give you a couple different scenarios: What if you add an additional $2,000 or $4,000 to your contributions – how will this affect your taxes owed? For 2016, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2016 is $53,000. If possible, it’s always best to max out your retirement plan contributions – that’s not only a 2016 tax tip, but also a great retirement preparation tip.

To qualify for the full annual IRA deduction in 2016, says TurboTax, you must either: 1) not be eligible to participate in a company retirement plan, or 2) if you are eligible, you must have adjusted gross income of $61,000 or less for singles, or $98,000 or less for married couples filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is deductible if your combined gross income doesn’t exceed $184,000.

5. Had a lean year? See if you qualify for EITC.

The IRS says 20 percent of workers fail to claim this valuable earned income tax credit. Whether this is your first year in the business and you’re still building your book, or you just had a lean year, you may qualify. If you worked but earned less than $53,505 in 2016, use the IRS’s EITC Assistant tool to see if you qualify. 

6. Report your health coverage.

The shared responsibility provision requires that you and your family have minimum essential coverage or qualify for a health coverage exemption. Otherwise, you must make an individual shared responsibility payment for all months that you didn't have coverage or an exemption. Most taxpayers simply need to check the box that indicates you had coverage for all 12 months. If this isn’t the case, you may need to fill out Forms 8965 (Health Coverage Exemptions) and 8962 (Premium Tax Credit) and submit with your taxes.

7. Do you qualify for these credits?

As Kiplinger says, “A credit is so much better than a deduction; it reduces your tax bill dollar-for-dollar.” So make sure to file every credit for which you’re eligible, such as

  • Child care credit. You may qualify for a tax credit worth between 20 - 35 percent of what you pay for child care while you work. However, if your company offers a child care reimbursement account allowing you to pay for child care with pretax dollars, that’s likely an even better deal. Kiplinger provided this example: if you qualify for a 20 percent credit but are in the 25 percent tax bracket, the reimbursement plan is your best choice. Because your reimbursement account is funded with pre-tax dollars, you avoid paying federal taxes and 7.65 percent Social Security tax on this amount. (Only amounts paid for the care of children younger than age 13 are eligible.)
  • Higher education credit. If you, your spouse or dependents had higher education costs last year, you may see some tax savings through one of three different benefits: the American opportunity credit, the lifetime learning credit and the tuition and fees deduction. There are various requirements that may limit the benefit, but the IRS once again offers a useful tool: the Interactive Tax Assistant tool to help you determine your best option. We’re just going to highlight one of these: the lifetime earning credit. It’s worth up to $2,000 a year, based on 20 percent of up to $10,000 you spend for classes that lead to new or improved job skills. Even costs for continuing education credits are deductible, but there are income limits ($55,000 - $65,000 for individual and $110,000 to $130,000 for couples filing jointly).

8. More 2016 tax tips: Can you claim these deductions?

  • Tax prep fees. If they equal more than two percent of your AGI (adjusted gross income), you can deduct them. This includes tax return preparation and electronic filing fees.
  • Medical and dental expenses. If total medical expenses for you, your spouse and dependents exceed 10 percent of your AGI, they’re deductible. Don’t forget to include mileage. If either of you is 65 or older, your medical expenses only need to exceed 7.5 percent of your AGI. And did you have to make renovations to your home for medical purposes? Those are deductible, says GoBankingRates.com.
  • State taxes you paid last year. On your federal return, you can deduct the amount of state taxes you had to pay when you filed your 2015 state income tax return last year. However, don’t unnecessarily report a state income tax refund, says Kiplinger. There’s a line on the tax form for reporting a state income tax refund, but most people who get refunds can simply ignore it even though the state sent the IRS a copy of the 1099-G you got reporting the refund. If you didn’t itemize deductions on your previous federal return, the state tax refund is tax-free. And even if you did itemize, a portion may be tax-free. The article goes on to explain, “It’s taxable only to the extent that your deduction of state income taxes the previous year actually saved you money. If you would have itemized (rather than taking the standard deduction) even without your state tax deduction, then 100 percent of your refund is taxable—since 100 percent of your write-off reduced your taxable income. But, if part of the state tax write-off is what pushed you over the standard deduction threshold, then part of the refund is tax-free.” 
  • Bonus depreciation. Kiplinger also said that business owners will want to take advantage of bonus depreciation – this 50 percent bonus applies for property purchased in 2016. It will also apply to 2017 purchases; after that, it will drop to 40 percent.
  • Home office deduction. In the past, we all shied away from claiming this deduction. However, TurboTax says eligibility rules for claiming a home office deduction have loosened to allow more taxpayers to claim this break. People who have no fixed location for their businesses can claim a home office deduction if they use the space for administrative or management activities, even if they don’t meet clients there. As always, you must use the space exclusively for business. You can write off expenses associated with the portion of your home where you exclusively conduct business (i.e. rent, utilities, insurance and housekeeping). The percentage of these costs that is deductible is based on the square footage of the office to the total area of the house. TurboTax says that a middle-class taxpayer using a home office who pays $1,000 a month for a two-bedroom apartment, with one bedroom exclusively as a home office, can easily save $1,000 in taxes a year. People in higher tax brackets with greater expenses can save even more.
  • Early withdrawal penalties. Did you withdraw funds from a CD or IRA account? The penalties you paid may qualify as a tax deduction, regardless of whether you itemize or not.
  • Charity work. You know to deduct your donations – but you may not know that if you perform charity work, you can claim 14 cents per mile plus parking fees, along with the cost of a t-shirt or other volunteer “uniform.” View GoBankingRate’s list of 50 tax deductions for more ideas.

Related: Last-minute 2015 tax tips for insurance agents

9. Before you file: Two more important 2016 tax tips.

  • Protect your identity. If you received an Identity Protection PIN, or IP PIN, in the past, then you must provide this number on your tax return not only this year but on all future tax returns, says BankRate.com. An IP PIN is a six-digit number assigned to eligible taxpayers that helps prevent fraudulent returns from being filed under your Social Security number. However, this IP PIN changes every year. You should receive your new IP PIN in the mail; if not, you’ll need to go to the IRS website to retrieve it.
  • How and when to file. Electronic filing works best if you expect a tax refund. Because the IRS processes electronic returns faster than paper ones, you can expect to get your refund three to six weeks earlier. If you have your refund deposited directly into your bank account or IRA, the waiting time is even less. If you owe money, you have several options: you can use IRS direct pay from your checking or savings account. Or you can file electronically and then wait until the April 17 deadline to send your check.

IRS lists 9 common filing errors to avoid when submitting your forms, everything from misspelling your name or forgetting to sign the forms, to having an expired ITIN (individual tax identification number) or incorrect bank account numbers. It’s a good checklist of 2016 tax tips to skim just before you hit “Submit,” https://www.irs.gov/uac/nine-common-filing-errors-to-avoid.

Please note: Arrowhead General Insurance Agency, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.