Who thinks about taxes in July? Not enough people, and that’s the whole problem. It seems that everything tax-related (books, articles, accountants and software) peaks in demand around March and April – in other words, at the last minute. Yet, as with other important things in life, waiting until the last minute rarely produces optimal results. The emotions most frequently experienced by last-minute filers are doubt, worry and anxiety – with good reason.
There is a better way. Although hardly anyone does it, savvy consumers who prepare for tax season early breeze through April without breaking a sweat. Here are some simple steps to take in that direction.
Determine Which Deductions You Can Take
If you itemize deductions, you likely have any number of opportunities to write things off throughout the year. If you happen to be an independent contractor, the list of potential deductions is even longer. Unfortunately, far too many taxpayers wait until late in tax season to even determine which deductions they can lawfully take. Waiting until the last minute produces one of two scenarios:
- A frantic few days or weeks during which the search for deductions takes much longer and is more complicated than it ever needed to be, or
- The amount of time and hassle involved dissuades you from taking any deductions at all (or taking fewer than you qualified for)
Clearly, neither of these is desirable from the standpoint of minimizing stress or maximizing tax deductions. The superior solution is determining several months ahead of time exactly which expenses may be written off. Study up with some free articles on the subject or use tax preparation software to get a comprehensive understanding that will equip you for our next step.
Start Writing Things Off Now
Of course, it’s not enough to merely know what you can write off. Actually writing things off is a process all its own, and one that is also best completed sooner than later. For one thing, all applicable receipts, bills of sale or other paperwork pertinent to deductible expenses must be kept and recorded. Furthermore, just keeping the receipts is not always sufficient. If ever you get audited (not an impossibility), the IRS will come looking for them and expect you to substantiate why they were deducted.
That’s why it helps immensely to mark receipts with your initials and the reason for writing that purchase off. You can also use software programs like Mint.com, Quicken and Microsoft Excel to track deductible expenses in a streamlined fashion. This way, if the IRS comes calling, you can point not only to a stack of organized receipts (more on that below), but also a structured, computerized record of each deduction you claimed.
Get Organized Today
A vital cornerstone of early tax season preparation is a well-organized record keeping system. Whether it’s a filing cabinet, a box or a drawer, you must have some means of making critical tax documentation accessible and meaningful. When the day arrives that retrieving tax paperwork causes you to groan or complain, the current system needs to go. While you will invariably customize your system to your own needs, ensure that it contains the following sections at a bare minimum:
- A section for copies of previous tax returns
- A section for receipts of deductible expenses (divided by year)
- A section for any written correspondence between you and tax professionals
The system will take an afternoon or two to set up, but once established, will pay dividends each and every year when pulling up tax documents is an effortless chore instead of a frantic, hair-pulling debacle.
Make Donations Ahead of Time
End of year “tax planning” often triggers flurries of rushed charitable donations as people strive to trim their tax bills at the last minute. This, too, is made needlessly difficult by poor timing. As with any other itemized deduction, charitable donations must be substantiated with receipts and other validating paperwork. By waiting until the end of a year, you run the risk of needing to chase down volunteer workers and charity administrators (who are contending with all the other last-minute donors) for the paperwork you need.
The slightest obstacle or delay on the charity’s end could render your donation totally unusable for the current tax year. Don’t fall into this trap. Instead, decide in advance to which charities you want to donate and make the donation(s) in time to calmly gather the needed paperwork.
Finally, the way to tie it all together is by actually filing your tax return early. The official deadline is April 15, but it may be preferable to file well before that date. In fact, you can file the previous year’s tax return starting on January 1 of the next year. However, this can only be done if you have identified your deductions, gathered the appropriate documentation and established some type of order in your record keeping. Absent these steps, it will be difficult or even impossible to file early.