It’s important to give tax preparation its deserved attention — not only to appease the Internal Revenue Service, but, more importantly, to ensure you get the return you deserve. You’re entitled to certain savings during the tax season, but it’s your responsibility to find them. Follow these steps to ease the tax preparation process, and ensure more money in your pocket in 2018.
Review life events
Explore the recesses of your memory, and try to remember all of the great things you did last year. Life milestones are good for more than just Instagram likes — life events might be eligible for tax deductions. Did you buy a house? Did you get married? Did you have a child? When it comes to taxes, it pays to be reminiscent. Take a minute to reflect on the year you had and any tax-deductible events
Get the right forms
Forms, forms, and more forms! Getting the right tax forms is the riddle of tax season: it is both the most important and most anxiety-inducing aspect of tax preparation. But don’t worry, despite the wide array of tax paperwork, getting the right tax forms is easier than you might think. Employers are legally required to provide W-2s on time, and for freelancers who make over $600, simply keep track of your income for when it comes time to file. Refer to the IRS website for in-depth details on the different types of tax forms to determine which ones you’ll need to file.
Keep receipts in the one spot
If you itemize deductions, keeping receipts in a safe place is imperative to maximizing your return. And no, cramming them in your wallet is not advised. This is especially important for freelancers that incur large out-of-pocket costs throughout the year.
Collect records for charitable contributions
You didn’t give to charity for the tax break, but it’s a nice perk. In order to receive a tax break for charitable donations, you need proof in the form of a receipt, and even sometimes written acknowledgment. To claim a write-off of $250 or more, the IRS requires that you have written acknowledgement that you did, indeed, make a donation and received no compensation in return.
How to secure tax credits
Identifying tax adjustments is one of the most significant ways to reduce your tax burden. Tax credits are there to be used, so don’t miss opportunities to increase your return. There’s an important distinction between tax deductions and tax credits: deductions are a dollar amount you can subtract from your taxes whereas credits are a set amount that is shaved off your taxes for those that qualify. There are tax credits for many things, but popular areas include child care, education, environmental protections, etc.
Plan for your tax refund
A sizable tax return should not be squandered — a night out here, a fancy dinner there, and then poof! That $3,000 return you intended for you savings account is gone as quickly as it appeared. This is not to say that you have to live like a monk, but tax returns are a good opportunity to build up a savings account. Budget ahead of time and stick to it when the return check comes.
Review your overall finances
Considering all the time and effort you’re putting into preparing for taxes, you might as well take it a step further and assess your overall financial health. You will already be up close and personal with many of your financial accounts and records, so why not do some overall bookkeeping? Go ahead and take note of your sum debt, evaluate your gross income, and check credit for free. Tax season is a great excuse to do some financial housekeeping, so use this opportunity to get everything, not just your taxes, in order.
Get an extension if you need it
The world’s best planning is no match for the unexpected twists and turns of life, and sometimes you just need a little extra time. If the tax deadline is approaching a little too quickly, and you expect you might be late, go ahead and file for an extension. A tax extension gives you a six month cushion and filing won’t be due until mid-October.
Make a personal info cheat sheet
In advance of the tax deadline, you should make a list of important, relevant personal information. While you can probably remember your SSN and DOB, can you recall the date you bought your vacation home? What about your kids’ SSNs? Information like this, and much more, will be required when you file taxes, so it’s best to collect it beforehand and keep it all in one safe place.
Collect financial records
Tax season requires a lot of paperwork, and this is especially true when it comes small business owners. If you own a business you will be required to present various financial records or run the risk of an audit. Some common documents that all entrepreneurs should have on-hand include: bank statements, payroll documents, your tax return from the previous year, and asset purchase documents.
Review your W-4
It’s possible that some of your tax information has changed since you filled out your W-4 at your job orientation. Many people fall into the trap of withholding too much or too little due to an outdated W-4. If your status, number of dependents, or any number of tax criteria have changed since you first filled out your W-4, it might be time to update it.
Make a list of expenses
Much like deductions, expenses reduce your taxable income, but exemptions come with far less restrictions. These important tax items come in several forms, such as child exemptions or local exemptions, but can get tricky when it comes to self-employment exemptions. If you are a freelance employee, tax exemptions are a crucial part of tax season. Nearly anything used for work can be exempted — from your car to your home utility bill — as long as you can prove it. This is where making a list, and safeguarding receipts will come in handy.
Stash some extra money just in case
According to the IRS, over 8 million Americans owed back taxes. This means, instead of cashing in on a tax return, they actually had to pay. This is common for many reasons: underwithholding, underestimating self-employment taxes, or filing late. Whatever the reason might be, many people end up owing the IRS, and you don’t want to be caught off guard. Consider stashing a little bit of extra in your savings account in case this happens to you.
Contribute to your IRA
If you have some extra money, put it away in a roth or conventional IRA. This will both reduce your taxable income and help build your nest egg. The maximum contribution you can make is $5,500 (or $6,500 if you are over 50 years old).
Remember, tax season is only as stressful as you make it. Practice some controlled breathing, maybe a little meditation, and you will survive. In most cases, you will come out the other side of tax season a couple thousand dollars richer — as long as you follow the guidelines outlined above.