Avoid the tax rush with these easy prep steps
Tax season doesn't have to be a stressful blur. Use these easy prep steps to make the tax season a breeze.
It's almost the holidays, which is fun! But that also means it's almost tax season — decidedly less fun. Filing in 2016 might be tricky for some people, so here's how to prep now, and avoid the headache later.
How to Organize Your Documents
Make sure your basic tax documents are ready to go.
1. W-2 Workers
Thankfully, these filings are the easiest. The most important item to save is your W-2 (most employers will mail them out between late December and February). Since you get a standard deduction of $5,000, it's unlikely that you need to keep any of your expenses. However, if your work-related expenses exceeded $5,000 in 2015, add them up and have all your receipts ready.
2. The Forgotten W-4
Do you routinely get huge tax refunds? If so, it's probably because you are withholding too much of your income. You can always fill out a new W-4 to change your tax withholding. Ask your human resources office for a form and for help, if you need it. When in doubt, ask your accountant how much you should be withholding from each paycheck, or visit the IRS withholding calculator. (Sorry, the answer is not "zero!")
3. The Endless Sea of 1099s
Are you a freelance or contract worker hounding your employers for 1099s? Remember that you don't have to! Just report the income. The IRS won't penalize you for reporting more income than there are 1099s, but they will penalize you for having earned more money than you reported, should that be revealed. Asking your employer(s) for copies of said 1099s can also cause errors at the IRS, leading them to double what you actually earned.
Also, be ahead of the dreaded 15% self-employment tax. Prepare your savings for tax season all year 'round. But if you haven't been, catch up now by saving 20% of your 1099 income between now and April. That should be enough to pay your tax preparer, the IRS, and have a little left in your savings to get the ball rolling for next year.
Things You Can Do to Lower Taxable Income
There are plenty of low-effort things you can to trim down your taxable income total, but also help you in the long run, including:
4. Make Charitable Donations By Year End
Some great charities include: The Boys & Girls Club, PBS, The Heifer Project, or nearly anything on DonorsChoose.org.
5. Increase Retirement Deferrals
Up your 401K or IRA from the standard vestment to 10%–15% for a few months. That'll be taken from your income before taxes.
6. Add Deductions Sooner Rather Than Later
This will help avoid lost or forgotten expenses. Flag the charges on your bank statements the second you realize they're business or work expenses. Remember to include job hunting expenses and any home appliances you also use for work.
7. Have Kids? Consider Opening a 529 Account
Get a start on saving for college. You'll receive a tax subsidy, and in some states, you can get a tax credit or deduction for your contributions to a 529 account.
8. Claim Part of Your Rent or Mortgage as a Home Office
Do you work from home? If so, you can claim up to 25% of you rent or mortgage payment as a home office. Ask your accountant to add that to your deductions.
Avoid IRS Penalties
You think you're doing everything right, and then you get slapped with atax penalty, or worse, an audit. Play by the rules to sidestep hazards.
9. Don't Omit Any Income
Always report income, whether it's inheritance, an unsent 1099, or any other source. It's never illegal to over-report, but it's definitely illegal to under-report! Be sure you beef up your deductions to make up for the income and you'll be fine.
10. Make Sure You're Signed Up for Health Care
The Affordable Care Act means healthcare within reach for everyone, but it also means you need to do your due diligence and sign up for health care or you will face more taxes. This can be hard for the millions of people who have been without health care for most of their adult lives, but it's actually not difficult.
11. Make Your Appointment Early
Got a good accountant or tax preparer? Chances are s/he is also a very popular accountant. Get an appointment on the books as soon as possible. Not only does this mean you won't get pinged for a late tax filing, but having the appointment set in stone will force you to get organized faster.
This article first appeared at Wise Bread.
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