As another tax season has just ended and we have had a chance to take a breath, I wanted to share a few thoughts regarding your 2015 tax returns and backup documents as well as some pre-planning ideas related to tax year 2016. Obviously, we have several clients whose returns are on extension and we will be completing their returns now through the October extended deadline.
A question I often get from clients is how long they should keep copies of their tax returns and tax-related documents. This decision is up to each taxpayer but our recommendation, if you live in Arizona, is to keep your backup documents and information for five years after the date you filed your tax returns, or the initial filing deadline, whichever is later. In other words, if you filed your return in March 2016, you would want to keep your backup documents until April 18, 2021 (5 years after the initial filing deadline for tax year 2015 returns). If you extended your returns and file in August this year, you would want to keep your documents until August 2021. The IRS statute of limitations is three years and the Arizona statute of limitations is four years so five years covers both. Although it is not mandatory, I recommend keeping copies of your actual tax returns (not the backup documents) indefinitely.
Since we are already into the second quarter of tax year 2016, you might want to consider making some changes to your record-keeping system now so that preparing your 2016 tax returns in early 2017 is much easier than it might have been for the returns just completed. One suggestion is to begin now keeping track of your business or charitable miles so that you have accurate information next year for tax return preparation. This also provides the documentation of these miles per the IRS guidelines in case they ever question this. There are paid and free options for apps that track your business miles for you using your smart phone GPS.
Another suggestion is to consider funding your tax year 2016 retirement account now or evenly over the course of the year so that you have taken advantage of this tax saving opportunity and potentially allow your retirement funds to work for you throughout the year.
Next, if you own your own business, you may want to consider making any entity structure changes now or retroactive to the beginning of tax year 2016 so that you can mitigate some of your social security and Medicare tax liability for the year. This may involve electing S-corporation status for your business and beginning to pay yourself a wage from your company in 2016. Please see my previous blog dealing with the benefits of structuring your entity in the most efficient way possible. If you own your own business, please consider using bookkeeping software such as Quickbooks to track your business activity if you are not already utilizing software such as this. I guarantee you that it will simplify and streamline your bookkeeping process.
Lastly, if you anticipate a large difference in your taxable income for 2016 compared to 2015, you will likely want to consider the tax consequences of the higher or lower income level. Higher income could affect the deductibility of the your itemized deductions or the amount of exemption deductions you can claim for 2016, as well as the ability to claim various credits that would otherwise be available to you. You also need to consider any increase or decrease needed in your withholding or quarterly estimated tax payments due to your change in income level.
Please contact us if you have any questions about the retention period for your 2015 and prior year tax returns and documents or the 2016 planning ideas listed above. We strongly suggest a planning session with us either mid-year or in late October or November to fine-tune your tax year 2016 strategy and tax situation to pay the least amount tax required by the IRS and state agencies.