Sorting through a year’s supply of documentation at tax time often causes panic, frustration and headaches -- not to mention paper cuts! But, if you plan well ahead of time, you could save yourself time and money when April 15th rolls around.
Meet with a tax advisor early in the year to go over your situation and to find out if there is anything you should be doing. By making an appointment early, you’ll avoid the April rush. Plus, you can get advice on steps you can take to improve your tax situation.
Organize your receipts
The best thing you can do to prepare for tax time is to get organized. Use separate files to store receipts for things such as medical expenses, charitable donations and business expenses. Having a filing system will make it easier to find documentation for deductions at tax time. Plus, you’ll save on your tax advisor’s fees because he or she won’t spend hours wading through unnecessary bills and receipts. Once you set up a filing system you’re comfortable with, it will be easy to update it and reuse it from year to year.
Check your withholding
If you are a full-time employee, tax payments are probably automatically withheld from your paycheck. But is your employer withholding the right amount? If you tend to still owe more than 10 percent of your taxes when you file your return, you probably haven’t been paying enough with every paycheck. If you receive income from outside sources, such as freelance work or capital gains, you may want to increase the amount withheld to cover your additional tax liability. However, if you plan to claim a lot of deductions for things such as charitable contributions or educational expenses, you can also request to have the amount withheld reduced.
While we all like getting that check in the mail, getting a big tax refund means that the government is holding some of your money and returning it to you interest-free. Ask your tax advisor or use the withholding calculator offered on the IRS website to figure out how much you should have withdrawn every month. Remember that major events, such as the birth of a child or a salary increase, will affect your taxes as well and will require an adjustment in your withholding. To request an adjustment, you should fill out a W-4 form and submit it to your employer.
File your installments
If you are self-employed, you will not have taxes automatically withdrawn from your income. In order to avoid penalties when you file your return, you will need to pay your estimated taxes in four quarterly installments. In most cases, estimated payments must add up to at least 90 percent of taxes due this year or 100 percent of your last year’s taxes. If you do not pay your taxes over the course of the year, you could be hit with non-payment penalties and interest when you file your return.
Contribute to a retirement fund
Find out what the contribution limits are for your retirement funds, as they can change. You can reduce your taxable income by paying as much as you can into your IRA, 401(k) or other qualified contribution plans. Your contributions are deducted from your income, so you are not taxed on that amount.
Consider your deductions
Make sure you’re aware of the deductions you are eligible for. For example, you can deduct any medical expenses that exceed 7.5 percent of your adjusted gross income (your total income minus total adjustments). Donations to registered charities can also be claimed on your taxes, including non-monetary donations such as clothing or furniture -- just make sure to get an official receipt for the fair market value of the items you’re donating. If you own a qualified hybrid car, you may be eligible for a clean fuel vehicle deduction. And of course, expenses for an at-home business (such as a business vehicle, travel expenses and home office, if they meet the criteria) can also be listed on your taxes.
Save your receipts
One of the most important things when claiming deductions is to have a paper trail. Make sure that you have receipts for all your expenses and donations and that you have properly itemized them, if necessary. A good rule of thumb when filling out your return is: if there’s no receipt, there’s no deduction.
Always make sure to consult your tax advisor about your taxes, as he or she can provide guidance about your specific situation.