Pop quiz: what is the least favorite time of year for most people? That’s right, tax time! It brings up memories of digging through stacks of mail in search of forms and nail-biting suspense of not knowing whether you owe taxes or worse yet, penalties. What many people don’t realize is that there are things they can do today to make the tax preparation process smoother. I may not have a recipe for removing taxes from your life, but I can offer tips that will take away some of the dread and stress.
1. Get yourself organized.
An effective system does not have to be elaborate! If you have a method for keeping all tax-related paperwork in one place, you are ahead of the game. Folders, binders and boxes can work. Technology can help you, but is not required. In fact, as long as you are diligent about using your system, virtually any system for staying organized will work well.
2. Keep in mind that certain life changes can cause you to have tax consequences.
Here are some examples:
- Marriage or divorce
- Relocating for work
- Death of spouse
- Receiving a lump sum settlement, distribution, or inheritance
- Medical expenses not covered by insurance
- Collecting Social Security benefits, and
- Taking care of grandchildren or other dependents.
If you have had any of these happen in your life, of if there have been any other big changes in your financial situation, it is a good idea to discuss them with your tax preparer early.
3. It’s not all doom and gloom – getting older can have tax benefits!
If you are over 50, you are eligible for catch-up contributions to 401(k) and IRA accounts. In 2016, that can mean up to $1,000 extra that you can put into your retirement savings. Be sure to check with your CPA on the timing of the contribution to get credit on your 2016 tax return.
If you are over 65, you get a larger standard deduction (an extra $1,250 if you are married, and $1,550 if you are single).
Those over 65 also get a lower threshold for deducting medical expenses. That means that if you are over 65, you get to deduct any unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (as opposed to having to overcome the 10% threshold). In order to take advantage of this, you must choose to itemize your expenses instead of taking the standard deduction.
Keep in mind that there are tax preparation assistance programs available to you. Look for a local Volunteer Income Tax Assistance (VITA) program, especially if your tax return is relatively straightforward and your annual income is lower than $54,000. VITA sites are typically found at community centers, malls, libraries and schools. They are staffed by trained and certified volunteers. You can find the nearest VITA site by doing an Internet search or calling 1-800-906-9887.
4. If you are under 59 ½, be careful with early withdrawals from IRA accounts.
These accounts typically trigger a 10% penalty. For example, if you take $10,000 out of your IRA to pay for everyday expenses, expect to pay $1,000 penalty in addition to the income taxes on the withdrawal. There are a few exceptions that allow you to withdraw funds early and not get penalized. They include but are not limited to having to cover medical expenses in excess of 10% of your adjusted gross income, having to pay for health insurance after a job loss and paying for college.
5. If you have a small business, keep careful records.
Your record keeping does not need to be complex or elaborate. What’s most important is that you track your receipts, as well as business expenses. Diligent record-keeping will also help you validate that you are running a business, which allows you to deduct certain expenses. I know one business woman who gets a thrill out of neatly taping her receipts to copy paper and filing it all in a binder.
6. Remember about identity fraud.
Request and review your free credit report from a major reporting agency every year. I recommend using www.AnnualCreditReport.com to get your credit report – it’s one of the few outlets that is truly free (no credit card required). Also, consider filing early to eliminate the risk of a criminal filing the tax return on your behalf.
Part of what makes tax season so difficult is that tax rules can be complex. If you are using the services of a tax preparer, speak with him or her about any questions you have. Bring up any changes in your expenses and income during the year. If you are anxious about the bill, ask for an estimate up front. Getting your paperwork assembled and organized will make the preparation go smoother, which can help eliminate last-minute surprises.