Tax Season is Over! How to Prepare for the Next One
Tax season is over. Now that we’re beyond April 15, aren’t you excited to start thinking about tax season 2014?
I didn’t think so. Nevertheless, here are two key strategies to consider throughout the rest of the year in order to make next year’s filing simpler and potentially less costly.
One of the more annoying parts of preparing to file your taxes is trying to locate your necessary documents and receipts received throughout the year, but if you stay organized you will make your life much easier.
Some people can spend a bunch of time just assembling all of the tax forms they receive in January or February (e.g., W-2s, 1098s, 1099s, etc.). But that’s nothing compared to the hours they spend assembling information that they received throughout the previous year. Such document sleuthing can include anything from discovering receipts for charitable donations and business expenses to finding the cost basis for investments they sold.
Of course, there’s an easier way: don’t wait until April to dig up all of your paperwork. For example, when you make a donation of clothing to a local charity, don’t take the receipt and leave it on the desk somewhere to contemplate later. Instead, fill it out right away— list what you donated and its approximate value. Put the date on it. Put it in a folder labeled “Taxes 2013.”
With business expenses, write down the business purpose on the actual receipt right away. For business meals, I suggest doing so while still at the restaurant. When you fill in the tip, just write the purpose at the top of the customer copy of the receipt. Bring it home and put it in that same “Taxes 2013” folder. To make your life much easier if you’re a business owner, enter tax-related transactions in your accounting software as they occur.
Monitor Your Payments
As a taxpayer, your goal is to pay enough taxes throughout the year to avoid an underpayment penalty but not so much that you end up providing a sizable interest-free loan to the government. To do so, you need to ensure that you pay at least the lesser of the following two numbers during the course of the year:
- 100% of the taxes you owed for the previous year (110% if your Adjusted Gross Income was $150,000 or greater)
- 90% of the taxes you will owe for the current tax year
Note that the phrase, “taxes you owe,” in the above paragraph is not the amount you might pay with your tax return; it refers to the total amount of federal income tax paid throughout the year.
What’s the key takeaway? Many people receive the majority of their income as employees and have it reported to them on Form W2. Furthermore, most people’s income does not vary greatly from year to year. If that description sounds like you, consider your last tax return. If you received a sizable refund, consider lowering your withholding by increasing your allowances.
To do so, simply re-file Form W4 with your payroll department. You can do so anytime throughout the year and use TurboTax W-4 calculator to estimate your exemptions. When you change your allowances in this way, your next year’s income tax refund will decrease or possibly be eliminated. On the other hand, implementing this strategy means you will receive an increase in net pay right away.
To take it to the next level, use some of your new money to increase your IRA or 401(k) savings. Doing so not only prepares you for your future retirement, but also lowers your taxes next April.