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Start early. You've heard the old adage, "plan your work, and work your plan". It's applicable to virtually everything in life (just like taxes). If you keep handfuls of receipts and records stuffed everywhere, then tax time will begin reminding you of those all-night cram sessions before the final exam. There's absolutely no need to put yourself through that when all that you really have to do is get organized. Buy a small filing cabinet just for storing tax-related information such as current receipts, past and present copies of your tax forms, and documentation that will help you prove your deductible expenses. Keep a notebook where you can jot down deductions as they occur, such as mileage for the business use of your car. You can also make a small investment in a software program that will help you organize and calculate your taxes.
Find a good tax preparer. If you know that your taxes will be very simple and straightforward and you don't have to worry about points, business expenses, nondeductible contributions or the like, then you can probably feel pretty comfortable going at it alone. But if you're not confident about completing the forms, or simply don't want to take the time, you'll need to find a good tax preparer. But don't wait until March to begin your search; start in September or October when the deadline isn't staring you in the face. Get referrals from friends, business partners, or financial professionals; don't just go by commercial advertisements alone. Once you've narrowed down your list of candidates, do some personal interviewing before you make a final decision on whom to hire.
Make your retirement contributions early. If you wait until April 15th to make your 401(k) or Keogh plan contribution for the previous year, you'll end up losing a sizable sum of compounded interest. Following the same pattern every year may reduce your retirement nest egg by many tens of thousands of dollars. There's no need to be lazy; simply put your money in early and let it go to work for you that much sooner. When Retirement Day comes, you'll thank yourself all the way to the bank and back.
Protect your possessions from loss. Take an inventory of your possessions and valuables; make photographs or even a videotape of them. If you're hit with some natural or manmade disaster, you'll be able to deduct those property losses. Keep a record of expensive purchases in a special place with your tax materials (remember the filing cabinet you just bought earlier in this article?). If you're burglarized, you'll be able to substantiate and deduct those losses, as well.
Use the Long Form. If you're married, own a house, have substantial investments or deductions, make a lot of money, or if you simply have a choice of using the Long Form 1040 or the Short Form 1040A, use the Long Form. It allows you to itemize deductions and possibly receive more of a tax break.
Focus your deductions. Learning about every tax deduction available can be time-consuming, overwhelming, and just plain unnecessary. Instead, focus your efforts on learning about the tax breaks in your profession or circumstance as much as possible. Get advice from a tax professional and ask colleagues or peers who share your vocation for tips.
Adjust your withholding. Everyone loves a big tax refund. But stop and think about it. You've actually given the government a yearlong interest-free loan with your money; money that you could have put to better use by investing it for your own financial wellbeing. If you're overpaying the government, readjusting the amount of federal or state income tax that's being withheld from your paycheck. But don't just spend the extra money that you'll start getting every two weeks; instead, use it wisely.
Don't pay what you don't owe. Professional tax preparers know what income isn't taxable. But if you're preparing your own taxes, make sure that you've got all the details about what you owe taxes on and what you don't. Some types of income isn't taxable, such as gifts, inheritances, life insurance proceeds, child support payments, personal injury damages, and disability benefits, to name a few.
Defer paying taxes for as long as you possibly can. Put as much money as you're able to into tax-deferred investments such as IRAs and 401(k)s. Buying and holding onto stock and real estate are other ways to own assets that appreciate but don't require you to pay taxes on the gain until they're sold. This is one of the major strategies used by wealthy individuals. And if you want to be wealthy, it's wise to do what wealthy people do.
Educate yourself. In any and everything that you do, knowledge is power. Spend some time learning a bit about the tax laws that apply to you. There's no need to try to master everything there is; the tax laws are extremely complex, and the rules are changed constantly. But there's a wealth of information available from numerous sources and from the Internal Revenue Service itself that will give you everything from basic guidelines to detailed instructions. There are also many tax professionals who stand ready to help you if needed.
