Phew…. That’s the collective exhale you hear as another Tax Day comes and goes. Maybe you file early and already have that refund in hand. Perhaps you wait until the last minute to dig out those dog-eared receipts, credit card statements, and 1099s and your return wings it’s way electronically to the Internal Revenue Service. No matter your tactics, you survive. But as with New Year’s Eve, you always resolve to do things differently… next year. Here are some Tax Day resolutions worth adopting now.
… to get organized.
Boulder, Colo., retiree Jon Bond rents out two single-family homes to supplement his income. That means keeping track of income and related expenses. “Every year I wait until March to dig through the paperwork and enter the information in a spreadsheet,” says Bond, who does his own taxes. “A few times, I even created the spreadsheet, but never filled it out.” Often he can’t find a credit card statement or check stub and then spends weeks tracking it down, on occasion missing the filing deadline.
Simple organizing methods work just fine, say experts. A multi-pocket expanding file labeled by category that holds all your receipts is one option. Or install Quicken or similar software. Enter every line item from your bank account and credit card statements on a monthly basis and generate a report at year’s end.
… not to overlook the big things.
One CPA tells of a longtime 30-something male client, who casually quipped as they were saying their goodbyes, “Oh, I meant to tell you we had a baby last fall.” Between the personal exemption for each child, plus a $1,000 tax credit, that oversight could have cost him $1,950. Be sure to tell your tax preparer about any major life changes such as buying a house, a job change, a new baby or a divorce.
… not to procrastinate.
If your tax pro suggests you allow for more withholding or estimated payments, do it. You’re better off paying the extra quarterly taxes than hoarding your money in a bank account, because you’ll earn less than 1% in interest, but the IRS will charge you a 3.4% penalty if you underpay.
… not to shortchange myself on charitable donations.
Raise your hand if you take boxes of items to Goodwill or Salvation Army, grab a blank receipt and then stash it somewhere. Instead, make a list and assign a value to all non-cash items you donate to charity. One woman donated so many women’s business suits they filled a mini-van. Convinced the IRS might not believe her generosity, she photographed the stuffed van as proof.
… to keep a mileage log.
You can deduct 55.5 cents per mile driven for business purposes, provided you maintain a mileage log. Sure you can go back to your calendar at year’s end and figure out where you went each business day, but filling out a log as you go will save you time and sanity. Consider using a smartphone app such as Milog or Mileage Log+.
… to follow the rules.
Accountants have seen it all. But may tell me they are shocked to have clients neglect to claim their required IRA distributions at age 70 1/2, leaving them subject to a 50% penalty. So if you don’t draw that $3,000, Uncle Sam now gets $1,500, ouch! Be sure to check with your broker, bank or credit union and have them remind you to take any required distributions.
Similarly don’t pull money out of your retirement plan before age 59 1/2. There’s the tale of a woman who paid for a wedding with her credit card, but to pay off the debt, drew money out of her IRA. Not only was she subject to a 10% penalty, but the withdrawal was taxed as ordinary income. It would have been smarter to take a home equity loan, which is low interest and tax deductible.
… to seek professional advice when needed.
A self-employed e-commerce marking consultant, could have saved herself $1,500 to $2,000 this year had she formed her business as an S-Corp instead of a LLC. Trying to save a few bucks, she prepared her own tax returns in 2012. She wasted a ton of time. When she met with an accountant, she learned she could have also saved a ton of money because she didn’t ask more questions about my business structure.
The benefit of using a paid preparer is his or her objective eye. Under an LLC, every net dollar is subject to self-employment tax. If the consultant was an S-corp, she would still pay herself but only her salary is subject to self-employment tax.
… to give my tax preparer the gift of time.
It’s never too early to start a conversation with your tax preparer. In fact, most would appreciate a brief sit-down this May. Top accounts report many clients often set appointments nearly a year in advance to force themselves to gather their documents early in preparation for a January or early-February sit-down. Be proactive. Ask questions throughout the year.
Don’t overlook the little things
It’s easy to forget the small stuff, but they can add up to big savings. Jackson Hewitt Tax Service lists the following as some of the items most overlooked by taxpayers. In all cases, keep your receipts.
- Hearing aids, canes, eyeglasses, and contact lenses.
- Required uniforms.
- Out-of-pocket expenses for volunteer work.
- Tools bought for your job.
- Business gifts up to $25 per client or customer.
- Laundry while traveling on business.
- Union dues.
- Tax preparation fees.