The tax code may have changed, but taxpayers still have one more filing to complete under the old system. And while you have until April 17, 2018, to file your 2017 tax return, it's usually not a good idea to wait. In fact, you can start preparing your return once your W-2s, 1099s, 1098s, and other tax forms are in hand.
Why start now?
With tax season well under way, here are four reasons why you should prepare your tax return as soon as possible:
- You may be due a refund but won’t know for sure until you run the numbers. If you expect a refund, make use of e-filing and direct deposit to get money back quicker. However, if you prep in advance and it turns out you owe taxes, you’ll have more time to pay the IRS. Just remember to pay your taxes before the deadline, or a failure-to-pay penalty may apply.
- You’ll know sooner if you’re eligible for deductible IRA contributions. You have until the April deadline to make last year’s IRA contribution. But if you prepare early, you’ll know how much you can contribute, whether the contribution is deductible and whether a Roth IRA makes sense. You also have until your return’s due date to make last year’s contribution to a Coverdell Education Savings Account—just remember to tell your account provider that the contribution is for the prior tax year.
- If you have a new addition to your family, you need time to get your child a Social Security number. You must provide a Social Security number on your return for all your dependents, even infants. Don’t wait until the last minute to request a Social Security number from the Social Security Administration.
- You need time to chase down missing records or correct ones with errors. By now, you should have records like charitable receipts and your mortgage interest statement (Form 1098) at hand. If you misplaced or haven’t received your tax-related documents, you’ll need to track them down. And if you find errors on any forms (for example, if the year-to-date information on your year-end pay stub doesn’t match your W-2), you’ll need time to get them corrected.
Sometimes mutual fund 1099s arrive late
While unusual, certain mutual funds can restate their distribution information as late as the end of February.
Normally, you’ll get your Form 1099-DIV anywhere from the end of January to the end of February. But if a fix is necessary, a corrected 1099 may be mailed out later. The chances of this happening are small, so you shouldn’t delay tax preparation just because you might get a restated 1099.
Your Form 1099-DIV should break down your investment income between qualified dividends (taxed at 20%, 15% or 0%, depending on your tax bracket), long-term capital gains and income taxed at your ordinary tax rate (short-term capital gains, non-qualified dividends and taxable interest income). Tax-exempt income should also be separated to show the portion of private activity bond interest, if any, reported to the IRS. Private activity bond interest is subject to the alternative minimum tax (AMT), unless the bond was issued in 2009 or 2010.
2017 tax deductions you should know about
As you prepare to file your 2017 tax return, keep in mind that this may be the last year you’ll be able to take some of these deductions as the new law scales back many of them. The deductions below are often-overlooked and could help reduce your 2017 tax liability, if you take action soon:
- Non-cash charitable contributions. Out-of-pocket travel expenses related to charitable activities are generally deductible (but not the value of your time). For non-cash gifts, most charities will provide a range of thrift values for commonly donated items. The Salvation Army, for example, posts a valuation guide for tax-deductible donations. Keep in mind that any gifts of used clothing or household items must be in “good condition or better.” It’s also a good idea to keep receipts of your contributions and take digital pictures in case of an audit. If you volunteered last year, any mileage you incurred may also be deductible.
- Note: The IRS requires a receipt for charitable gifts of $250 or more (if you’re audited, a canceled check isn’t enough). You’ll also need a bank record for all cash donations, regardless of the amount.
- Refinancing costs. If you refinanced your mortgage, any points paid can be deducted on an annual basis amortized over the life of the new loan. Unamortized points on a previous refinance can be deducted in full the year of the subsequent refinancing.
- Health insurance premiums for the self-employed. If you’re self-employed and not eligible to participate in your spouse’s employer-paid plan, you can deduct 100% of your health insurance premiums.
- Investment fees and tax-preparation expenses. Certain investment fees and other costs related to the production of income and/or tax preparation may be deductible.1
- Moving expenses. If you moved for work-related reasons, you might be able to claim a deduction for some of your out-of-pocket moving costs.
- Education expenses. You may be able to claim a dollar-for-dollar tax credit (or above-the-line deduction, depending on income level) for qualified education expenses incurred by you, your spouse or your children. You may also be able to deduct student loan interest. Check the IRS Tuition and Fees Deduction to see what qualifies.
- Work-related expenses. You may be able to deduct expenses that aren’t reimbursed by your employer, including the cost of uniforms, travel, continuing education and union dues.1
- Casualty losses. You can claim a deduction for casualty and theft losses over a certain dollar amount. If you live in a federally declared disaster area, you may also qualify for other tax breaks. You can check the Federal Emergency Management Agency (FEMA) website to see if your county has been identified as part of a disaster area. You can also check out the Tax Relief in Disaster Situations for updates.
- Sales taxes. If you live in a state that has sales tax but no income tax—including Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming—you can deduct state and local sales taxes on your return. Residents of other states have the option to take the sales tax deduction in lieu of the state income tax deduction. This might be worth a look if your state has a low income tax; take the time to consult with your advisor. The IRS also has a Sales Tax Deduction Calculator you might find useful.
Cost basis reporting rules
Since 2011, financial institutions have been required to report the adjusted cost basis of sold securities to the IRS, including:
- Equities acquired on or after January 1, 2011.
- Mutual funds, ETFs and dividend reinvestment plans acquired on or after January 1, 2012.
- Other specified securities, including most fixed income and options acquired on or after January 1, 2014.
Keep in mind that the reporting rules only apply to the sale of securities purchased on or after the effective dates above. As the taxpayer, you are ultimately responsible for the information on your tax return. So it’s a good idea to save your original purchase and sale documentation—including records of any automatic reinvestments—to make sure it matches the information financial institutions report to the IRS.
Also, even though FIFO (first in, first out) is the IRS default method for both individual securities and mutual funds, most institutions (including Schwab) will report individual securities using the FIFO default method and report mutual funds using the average cost single-category method. Make sure your financial institution is using the accounting method of your choice.
Knowledge is power
Taxes can have such a significant impact, so it pays to be aware of the rules and know how they might affect you—even if you have a tax professional preparing your return. Schwab clients can log in to access tax tools and resources that include a cost basis calculator. The IRS is also has resources available to help you understand the rules, including: Publication 17: Your Federal Income Tax and Publication 550: Investment Income and Expenses.
What about my 2018 taxes?
With the ink barely dry on the new tax law, people may have questions about whether or how to address their tax and financial plans for the coming year. If you work with a tax professional or financial advisor, consider meeting with them to discuss the potential impact of the new tax law, review any changes to your financial situation and discuss your plans for the coming year.
Again, the new law shouldn’t affect most people’s 2017 filings, but 2018 will be under the new system, so it makes sense to keep that in mind even as you file your 2017 return.
1 Subject to the 2% of adjusted gross income floor for miscellaneous itemized deductions.
What you can do next
- Make sure that you’re considering the potential tax implications of your investments. Learn more about investment advice at Schwab.
- Talk to a financial professional. Find a Schwab Financial Consultant or visit a branch near you.
- If your tax situation is complicated, you may want to consult a tax professional.