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How often do you think about your taxes? If your answer is "Once a year – between April 1st and April 15th;" unfortunately, you're far from alone. Many, many people close their eyes (either intentionally or unintentionally) to the entire subject of taxes during the three-hundred-fifty days that remain. But that attitude only causes stress come tax time, due to hurried searches for important documents and nine-month-old receipts, and wonderings if enough has been paid in during the year to avoid the 'sticker shock' of a hefty tax bill. There's a better way to do things, and the good news is that it's not very difficult at all.
You plan for lots of other things in life, so why not plan where your taxes are concerned, as well? There's really no good reason not to. Tax planning simply involves organizing and preparing financially ahead of time – and making adjustments along the way, if necessary – so that your taxes are covered in the most efficient manner for your circumstances. It means monitoring your tax situation throughout the year so that no unpleasant surprises sneak up on you in the springtime. In doing so, you can tailor your tax bill (or tax refund) by withholding more or less from your salary and scheduling to your financial advantage any tax-deductible expenses that you anticipate incurring. Of course, that's not to imply that you can't hunt for deductions and tax credits at filing time; as a matter of fact, by staying prepared it's likely that you'll be much more aware of the tax breaks that you're eligible for, and you won't need to spend a great deal of time searching for ways to cut your tax bill.
Start today preparing for next year's taxes. Then, as soon as you've filed, start planning for the subsequent year, giving particular attention to any areas that your 1040 shows you need to do something about. Here are a few points to make things a bit easier:
- Every person listed on your 1040 filing form must have a valid Social Security Number, including newborns. If you or your spouse will be giving birth this year, put this close to the very top of your 'to-do' list, because without it you won't be able to claim the child as a dependent.
- Make sure you have all of the necessary tax forms. Your employer is required to issue you a W-2 form by the end of January for the preceding calendar year. If you do freelance work, be sure to get 1099 forms from all clients that paid you more than $600 during the tax year. You may also get 1099s for interest earned on bank accounts and investments and for various other items.
- Instead of sending in a paper return, e-file your taxes instead. Paper returns are not only hand-prepared but hand-entered into the IRS' computers, as well, thereby providing two separate opportunities for data error. With today's tax-filing software you're assured of the proper forms for your particular tax circumstances and you won't have to second-guess your math skills (or lack of them).
- Above all, keep good records. If you have a home office, make sure that your records are concise and complete. If you use your car for work, record your mileage and expenses. If you give to charity, get signed receipts. Keep your records organized and in a safe location. Then, when April 15th approaches, you won't need to waste valuable time gathering documents together, and preparing your 1040 for filing will be much closer to a breeze than a nightmare.
