Anxiety. Overwhelm. Cold sweats. Eyes glazed over.
Every year, these are the emotions felt by many of us when it comes times to filing our tax returns. It seems like tax season sneaks up on us every year, and no matter how hard we try to be proactive, and plan and prepare, most of us are left doing everything last minute. To help you get a handle on your tax return this year, and better prepare for tax season next year, I asked CPA Natalie Asghari (www.nabacpa.com) to share some top tax tips that you can implement in your financial life. Here are 15 tips to help you out:
Tax Tips for Everyone:
1. Gather all your records in advance.
- Gather all documents or forms you’ll need when filing your taxes: receipts, canceled checks and other documents that support income or deductions you’re claiming on your return.
- Always keep originals. Make copies of all valid documents that you will provide for filing.
- Group together documents regarding mortgage interest payments, property taxes, charitable gifts, medical bills, and any other items that may count as deductions.
2. Keep track of important records.
- The best way to do this is being organized throughout the year. Don’t wait until the end of the year to consolidate your documents. Gathering information at the beginning of the year will save you time and reduce the chance of omitting information and unnecessary amending tax returns when it actually comes time to file.
- Keep track of your expenses on a quarterly or monthly basis by record-keeping, especially if you are self-employed.
- Keep record of tuition, books, computers, and fees that you pay because you may be able to claim an education credit or deduction for the amounts you pay.
- Records need to be kept for at least three years (four for state of CA) from the date you filed the related income tax return, you should keep a copy of your actual tax returns, W-2s, 1099s, etc.
3. Decide how you’re going to file.
- Be sure to consider different tax statuses if you are eligible for more than one. For example, if you’re married and can file either jointly with your spouse or separately, be sure to consider both options. This might be something for you to investigate throughout the year, especially if your circumstances change.
4. Review! Review! Review!
- Don’t rush. We all make mistakes when we rush. Mistakes will slow down the processing of your return. Be sure to double-check all the Social Security numbers and information on your return. Remember, you are the taxpayer signing the return and you are responsible for any missed information.
5. Keep up-to-date on tax laws.
- While it might be a good idea to get expert advice regarding tax law, you should also keep an eye on the news for anything that might affect you or your business. A well-informed client can often help an accountant to give the best advice, so make sure you know about any changes in tax provisions that could apply to you. Asks questions if you believe something you read or heard may affect you.
6. Hire an accountant or professional tax preparer to do your taxes.
- Because constant changes make the tax code more complex each year, you may be more comfortable–and be able to use tax savings strategies, pay less taxes or receive a bigger refund–if you have a professional prepare your returns.
Tips for Self-Employed
7. If you are self-employed, you may have to make estimated tax payments.
- This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments, you may be penalized for underpayment at the end of the tax year.
8. Keep a good record of income and expense for your business.
- To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business.
9. Set up a retirement plan.
- A retirement plan not only benefits you later in life, it is a method of reducing your current tax liability, and often reducing taxable payment on a set amount of money at any point in time. Your taxable income at retirement will most likely be a lower bracket than your working income.
10. Don’t miss the health insurance deduction.
- The deduction is for medical, dental or long-term care insurance premiums that self-employed people often pay for themselves, their spouse and their dependents.
11. Deduct transportation costs.
- You should be able to fully deduct any transportation costs (plane tickets, taxis, airport parking, etc.).
- If you’re driving to meet a customer or conducting business travel, you will need to keep a schedule/log with dates, mileage, etc. If your trip was primarily for business purposes, you can deduct certain expenses, such as hotel costs for any business days; if you combine work and play, you can’t deduct lodging and meals for your personal days.
12. Deduct meals and entertainment for clients.
- Paying for meals and entertainment for current or potential clients can be deductible, as long as the meals or entertainment was directly related to and associated with the business. Be sure to keep records such as date, purpose of the meeting and parties involved.
Tips for Employees/Employed Individuals
13. Collect all your W-2s and 1099s.
- You’ll need these to file your tax return. Check and make sure your withholdings from paychecks are correct based on your situation–especially if you had life changes such as purchasing a primary residence, getting married or having a child.
14. Pay estimated taxes.
- If you do not pay your tax through withholdings, or do not pay enough tax that way, you might have to pay estimated taxes or you may have additional tax liabilities when it comes time to file your tax returns. You may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rent, and royalties.
15. Deduct job-related expenses.
- If you paid for expenses related to your job during the tax year, many of these expenses may be eligible to be deducted on your return if they are unreimbursed by your employer. Deductible unreimbursed employee expenses generally fall into one of two categories: job-specific expenses and travel-related expenses. Some examples of job-specific expenses are protective clothing required in your work, such as hard hats, safety shoes, and glasses; physical examinations required by your employer; dues to professional organizations and chambers of commerce; licenses; and regulatory fees, to name a few.
Don’t let tax season scare you into an anxious state this year. Instead, spend some time, plan ahead and follow the tips outlined in this article. I believe you can make it through tax season without pulling out your hair. Now, I ask you, what tip will you be following this tax season?
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes