For most people, it is virtually impossible to associate this day, Groundhog Day, with anything other than the mid-90’s movie that shares its namesake starring Bill Murray, chronicling his inability to escape reliving the same day over and over again.
Tax season may not seem all that different. It’s impossible to avoid the yearly ritual of preparing your income taxes- an endless loop of W-2s and relentless H&R Block Commercials. The only thing missing is Sonny and Cher’s “I Got You Babe” waking you up every morning, and of course that rodent predicting the weather.
By now, you’ve most likely started to receive some of your tax documents- your W-2 from work, your mortgage interest statement, your 1099 documents showing the interest on your bank account (which lately can be depressing in their own right), among others. There’s no avoiding it. There’s a reason taxes are recognized as one of life’s only two certainties.
Fortunately, tax season doesn’t have to be a stressful or painful time. With a little bit of planning, it can be a positive experience.
My goal in this, the first Life Values Financial blog on the new site, is to share some tips on how to make the most of tax season and avoid the anxieties that can otherwise coincide with filing your return.
I am here to help. So let’s get started!
Sounds simple enough, right? But it’s surprising every year how many people either misplace or flat out lose documents they need to file their return. Fortunately, a lot of documents now are easily downloadable online, but it’s still important to have a designated file in place for all of your relevant tax documents (whether physical or electronic).
Not only will this save you the stress of trying to track down your documents when you’re finally ready to prepare your return, but if you hire someone to do your taxes for you, having everything well organized could lower your fees if your accountant doesn’t have to pester you for missing information.
So, as the documents arrive whether in your mailbox or inbox, don’t procrastinate. Organize everything so that you’re as prepared as possible whenever you- or the professional you’ve hired- is ready to complete your return.
Before your documents even begin to trickle in, it’s helpful to know what exactly you are waiting on to arrive. Make yourself a list of all of your income sources, potential deductions, or any other relevant information. If you have a tax preparer, if they are worth their salt, they will provide you with a customized organizer that can serve as guide for gathering this data.
(On a related note, if you’re someone that likes to get their taxes done sooner rather than later (believe me, as a tax preparer, my favorite clients are the ones that get their information to me in January/February), it can feel like an eternity waiting for the last of your documents to arrive. In some cases, you have a right to be impatient. There are deadlines set by the IRS as to when certain documents are supposed to be provided. You can find that list here.)
It’s good to be aware of these dates so you know ahead of time when to expect certain forms. If that deadline passes, and you haven’t received your document, you are well within your right to contact the company/organization/individual and let them know you need that document ASAP.
Reduce Your 2016 Tax Liability
You might be asking yourself -“Isn’t it too late to do anything about last year?” After all, 2016 has come and gone. However, there are still steps you can take to reduce your tax liability. Contributions to Traditional and Roth IRAs can be made up until the tax filing deadline (not including extensions) for the prior year. In addition, self-employed individuals can establish and contribute to a Simplified Employee Pension (SEP) IRA for the prior year until the tax deadline INCLUDING extensions.
Not everyone qualifies to make deductible IRA contributions, but if you are able to do so and it makes sense for you from a planning standpoint, it can help reduce your taxable income for 2016
Health Savings Accounts are another tool that certain taxpayers can establish to reduce their tax liability. Specific eligibility rules apply, such as being part of a high deductible health insurance plan, but for those that do qualify, this is another type of tax-reducing account that can be opened and funded before the tax filing deadline.
Learn from Past Mistakes
“You can never make the same mistake twice because the second time you make it, it's not a mistake, it's a choice”
This quote might be a bit dramatic, but the point remains the same. Many people have made a tax-related error at some point in the past. Perhaps you forgot to give your accountant a statement from one of your bank accounts. Maybe you thought you could claim your child that decided to move in with you after college and incorrectly added them as a dependent. Or maybe you didn’t have enough taxes withheld from your paycheck during the year. As a result, you may have even received a notice from the IRS saying you owed them a little money plus some interest.
It’s okay- things happen. The important step is to make sure the same error doesn’t happen again by making adjustments to your process. If it’s a document you misplaced last year- be sure this time around you properly file that statement as soon as it arrives (see earlier). If it’s a misunderstood deduction, have a discussion with your tax preparer about the situation to make sure you are on the same page (or if you prepare your own taxes, study up on the rules). If it’s a matter of proper withholding amount, talk to your HR department about changing your exemptions. There are solutions to past mistakes.
Communication is Key
Speaking of being on the same page, it’s important to have open lines of communication- whether it’s with your spouse, your business partner(s), or your tax preparer. Otherwise, deductions could be missed (maybe you didn’t realize your spouse gave $500 to the SPCA after seeing one of those Sarah McLachlan commercials) or other errors could arise.
With respect to your tax preparer, a good accountant will take the time to review all of your information to make sure things are in order. Of course, they can’t confirm every source of income or expenses you have- that responsibility falls on you- but a thorough discussion can shed light on a deduction or tax credit you otherwise may have missed.
Consider Hiring a Professional
I’ve made a number of references in this blog to the fact that some people enlist the help of professional tax preparers, which I highly recommend in many cases. Sure, this tip might seem a little biased since I am an Enrolled Agent offering tax preparation services. But the reality is that for many people, despite the availability of do-it-yourself tax preparation software, it’s worth seeking the help of a professional for accuracy and peace of mind. These software programs are not foolproof- contrary to what they advertise- and a professional preparer is more likely to catch errors like missed (or overstated) deductions and is able to explain more complex tax rules than a Q&A with a computer program.
So, while some people are comfortable (and even might enjoy) filing their own return, it may be a wise and anxiety-reducing investment to hire a professional tax preparer.
Tax season can be a stressful time for most people, but by remaining organized and attentive and having a good working relationship with your tax preparer should you choose to work with one, it doesn’t have to be that way.
And, lastly, just remember that whether the Groundhog sees his shadow or not, tax season will come to a close and springtime will be here before you know it!
United Planners and its Registered Representatives do not provide legal or tax advice. The tax information contained herein is general and is not exhaustive by nature. It was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Federal and state tax laws are complex and constantly changing. You should always consult your own legal or tax advisor for information concerning your individual situation.