The saying is true: the only thing that is guaranteed are death and taxes. Having said that, it makes sense to always prepare for taxes every year, but many people are too scared to file taxes until the very last minute. This adds unnecessary stress to your life when you could simply prepare in advance, but like with any phobia, avoidance is a natural reaction.
Three out of every four filers receive a refund, yet, nobody likes income tax time. Let’s find a way to make the experience less hectic and easier to endure.
Income Tax Form Filing Made Easy
Whether you file your own taxes or use a professional preparer, the key to a stress-free process is organization. Trying to make sense of a pile of crumpled paper receipts, canceled checks, brokerage statements, and other miscellaneous pieces of information is overwhelming and time-consuming. The disarray takes away valuable time for you, and will cost you extra if you are using a professional tax preparer. Lack of preparation also increases the likelihood of mistakes in determining the correct tax liability. If you pay too little, you may be subject to a tax audit and additional penalties; paying too much effectively gives a donation to the government that could have been returned to you in a refund. Avoid such troubles by following these tips, and if possible, use a financial coach like Lassise Financial Coaching to take the lead on this stressful time of year and guide you through tax season.
1. Collect Pertinent Income and Expense Information
Around the end of January each year, employers, vendors, financial institutions, and others prepare and forward various forms and information pertinent to your filing. Create a set of files, whether a large multi-pocketed accordion file, a group of large manila envelopes, or a digital filing system on your hard drive to sort and separate the data into one of the following categories:
- Personal Information: This information should include the legal names of who is filing and who is covered by the return (spouse and dependents). You need Social Security numbers and dates of birth as well. It is also wise to keep your primary bank account number and bank routing number available so you can request a direct deposit refund. One less hurdle to worry about during this stressful season.
- Income: Common forms include W-2s from employers, 1099 forms for other forms of income such as self-employment, investments, and retirement distributions, and K-1s.
- Personal Expenses and/or Deductions: While you will receive Form 5498 for IRA and health savings accounts contributions from vendors, and Form 1098 for home mortgage interest deductions, most of the information documenting allowable deductions such as business expenses, entertainment, or travel must be taken from other financial documents such as check registers, cancelled checks, bank statements, and credit card statements. Download and print summaries of the prior year’s transactions for each credit card, and review each transaction to determine whether it may be deductible.
- Business Information. If you own a small business, perform freelancing jobs, or have other side income, you need to keep the business income and expense items separate from your personal information. There are some expenses that are deductible for a business, but not a personal filer. If you have questions about what type of information to save, review Schedule C of the 1040.
2. Review Tax Filings from Previous Years
For most people, the changes from one tax year to the next are not drastic. Previous tax returns are great reminders of areas that can easily be overlooked and missed during your return this year. You can use your form to serve as a template for future tax returns, but bear in mind, if your income changes greatly from the year before, you may need some additional guidance.
3. Fund IRAs and SEPs to Allowable Limits
If you are participating in an employer-sponsored individual 401k plan, 403b retirement plan, or other qualified retirement plan, the deadline for contributions is December 31st. However, the opportunity to fund an IRA completely is available until April 15th. If you are younger than 50 years of age and have contributed less than $5,500 for the current year, or are older than 50 and have contributed less than $6,500, you can still invest money on a tax-sheltered basis for last year.
If some or all of your income is generated via self-employment, you can set up a simplified employee pension (SEP) IRA until the due date of your tax return (including extensions), and contribute up to 25% of your self-employment income. If you have the opportunity to choose between paying income taxes or funding your retirement, it should be an easy decision. While Roth IRA contributions are not deductible, IRA and SEP contributions are fully deductible depending upon your income, filing status, and participation in an employer plan. Income within a retirement plan – whether IRA, SEP, or Roth IRA – is not taxed until withdrawn.
4. Automate or Outsource Tax Calculation and Filing
While the IRS has made a strides in simplifying tax forms and in turn reduce the time and complexity of filing a tax return, it remains an ominous task, especially since it occurs only once per year and often is conjoined with anxiety. Fortunately, a number of companies offer software programs to help filers complete the task quickly and relatively inexpensively.
Unless you are confident in your math and accounting skills, you should use one of the popular software programs from TurboTax, TaxACT, H&R Block, or other providers. The IRS even offers free tax filing software for taxpayers with an adjusted gross income of $58,000 or less. An easy way to see if you qualify for the free software is to check last year’s return for your adjusted gross income (AGI) which appears on line 37 of Form 1040.
For those with incomes greater than $58,000, the IRS provides Free File fillable forms for electronic filing. However, the forms offer only basic guidance, so you must know how to do your taxes yourself. Most of the filing programs allow you to keep track of any refund due and select the method of payment you desire (direct deposit, paper check, or hold and apply for the coming year).
The decision to use a professional preparer or a software program should be based upon your income, the complexity of your return, unusual events that affect your income or expenses, and your concern about a tax audit. Both are great options, and aren’t very different experiences. The typical software is not the easiest to navigate but leads the filer through a series of detailed questions to verify amounts and the appropriate tax treatments; this can also be offered to you in any store-front, but with time constraints as you can’t get up and leave in the middle of your filing. In either case, the quality of their work depends upon the information provided to them as a result of your diligence and earlier organizational preparation for filing taxes.
Tax filers who should consult an experienced tax professional before filing taxes this year include those who:
- Have a gross income greater than $150,000
- Participate in complex investments that have tax preference or are managed through partnerships or private businesses
- Experienced a large change in either income or expense during the previous year, or a life-changing event such as the death of a spouse or partner, a divorce, marriage, bankruptcy, change in the number or status of dependents (such as caring for aged parents or a child moving back home), or retirement
- Started or closed a business, purchased or sold a home, rented a home or room, or received or paid significant fines or penalties related to a lawsuit during the tax year
- Are concerned that tax filing would result in an audit
- Have concerns about conducting calculations accurately
If you meet any of those descriptions, the cost of advice from a certified public accountant or tax attorney will be worth the peace of mind. It is fully tax-deductible (so long as the fees are in “connection with the determination, collection, or refund of any tax”), and may result in a lower tax liability. Readers should note that personal legal expenses for other purposes are considered “miscellaneous itemized deductions,” and are deductible in excess of 2% of AGI.
5. Do Your Research
Since tax laws and interpretations are always changing, it is in every filer’s best interest to be as informed as possible. Even if you are using a tax advisor, it is wise to understand the tax issues that affect you as much as possible to make the best tax decisions for you.
Spending an hour or two online researching specific taxable situations or conditions that are relevant to you is easy. For example, entering the term “freelance income” in a search engine reveals numerous sources about the tax treatment and filing of freelance income. A search of the term “home rental income” delivers a similar number of sources about the treatment of home rental income. You can never know too much about income taxes – after all, it is your money that you keep by minimizing your tax liability.
6. File Early
There are three good reasons to complete your filing as early as possible:
- Information Is Readily Available. Employers, vendors, and financial institutions are legally obligated to mail the required W-2s and 1099Rs by January 31st. Completing your taxes as soon as you have information prevents confusion, tension, and the loss of data.
- Filing Is Inevitable. It is a duty that is required every year – why procrastinate? Getting it behind you gives you time to focus on other things.
- You Can Invest Your Refund as Soon as Possible. It is your money and it is not earning interest in the government’s till. File your return and save the refund.
The one reason to delay filing until April 15th is because you owe taxes. If you have tax liabilities, the best approach is to complete the calculations and fill out all of the required forms, but delay the actual filing until April 15th. There is no penalty or interest charged if you file and remit any unpaid balance at that time.
Preparing for and paying taxes doesn’t have to be a hassle – it is the consequence many people bring upon themselves by procrastination and disorganization.
Do you want to spend the evening of April 15th relaxing with a nice meal or reading a good book instead of waiting in the cinematically disastrous line at the post office? Contact Andrew Lassise at Lassise Financial Coaching so he can prepare you for your tax return and filing, and take the pressure off of filing this year. Andrew can also work with you to guide you into a less stressful 2020 tax season with tips and pointers to help you prepare. Click the big green button below and let Andrew save you time and money, and get you the tax refund you deserve!