5 Habits For Easy Tax Preparation
You probably wouldn’t be too surprised to find out the number of Americans who enjoy filing their taxes is low. The tax code is massive, and grows bigger every year. Even tax-professionals don’t like reading it. With a few good habits in the year, you can quickly and easily prepare your return and send it off to the IRS for processing. Here are 5 Habits For Easy Tax Preparation:
Make Good Record Keeping A Habit
Easy tax preparation is like housekeeping; a little bit every day is easier than cleaning a whole weekend once a month. Record keeping can be as easy as pens, paper, twelve file folders and some paper clips. For people with smartphones, this is as easy as taking snapshots of the receipts as they come in.
Keeping track of your revenues and expenses gives you a clear picture of what your profits look like and what your taxes will be. It’s also a way to dodge getting audited - if your records are accurate and you can produce documentation on request, Uncle Sam will largely leave you alone.
If you didn’t keep good records, then Uncle Sam can make your life a lot more complicated. The IRS is interested in looking closely at returns with unusual claims. You can spend 10x the time, money and stress trying to sort things out after the fact. Installing easy tax preparation habits upfront is much simpler.
If you’re self-employed, and even if you aren't, error on the side of recording too much. It’s easy enough to remove inappropriate deductions later, and chances are there are more deductions available to you than you realize.
For example, not only is there a tax impact on any winnings in a casino, there’s also potential tax impacts on your losses. Losses can be used to offset the gains. Are you keeping a detailed record of this?
Ideally do your record keeping daily, if you have enough volume to justify it, or weekly. Do it monthly at an absolute minimum.
Don’t Waste Too Much Time Chasing A Big Tax Return
It’s important to try to avoid owing money to the IRS. Those payments make an unpleasant dent in your savings and can come with "underpayment penalty charges".
It’s also important to avoid going in the other direction as well.
It’s not "bad" to celebrate a big return at tax time, but it probably means you could have rearranged your finances so you were saving more every month. This money could have been put somewhere where it was gathering interest. Or it could have been paying down mortgages and student loans faster.
It may seem like nickels and dimes, but wealth is built on nickels and dimes. Windfalls happen, but gradual savings is by far the stronger strategy for building a high net worth.
Having the IRS hanging onto your money for a year, or multiple years in some cases, is like giving them a loan at 0% interest -- wouldn’t you rather that money be working for you?
Your goal should be to adjust your W-4 federal tax withholding to balance your future ‘refund/balance owing’ amount to be close to $0. Keeping strong records will help here too. You want your return to be efficient.
Pay For Tax Software
Doing your taxes by hand is slow, and creates more room for error. Put the pencil and pink eraser down and get your hands on an online tax prep program. Every year, these systems remove massive amounts of human error and take a fraction of the time to use. It’s the gold standard of easy tax preparation
You can use their knowledge data to answer your questions, the arithmetic will be perfect, and you can e-file your return quickly and easily. The IRS can process them much faster too - which means faster refunds..
If your returns are more complex, or you’re self-employed, taking your return to an Accountant is a good idea, but do you know what Accountants use? Tax software, software not much different than what you’d be using at home.
File On time, Every time.
Unless you like paying late fees, this is a no-brainer.
If you file late and you owe money, you’ll accrue a 5% penalty for every month it’s late. This does have a ceiling; the penalty can’t exceed 25% of your unpaid taxes.
Filing late comes with a penalty all to itself. If you’re 60 days late (past the deadline or your extension deadline) the IRS can hit you with the lesser of $135 or an amount equal to 100% of your unpaid taxes.
Self-employed people who fail to file over three years will stop receiving Social Security credits. Which of course means you’ll see a negative impact down the road when you retire.
You should file on time even if you can’t pay any outstanding balance. You’ll dodge some of the penalties and you can work with the IRS to come up with a payment plan.
Invest for the long term
This for Taxpayers who are getting a bit more sophisticated in their financial sandbox. This won’t necessarily make preparing your taxes easier, but it’s a long term habit worth getting into.
Yes, look for every deduction you can when it comes to your regular expenses. But once you’ve evolved from ‘saving money’ to ‘investing money’, it’s time to think about how to reduce those tax liabilities.
The IRS differentiate ‘short term’ and ‘long-term’ investment holdings by whether or not the asset was held more or less than for 365 days.
Short term capital gains (365 days or less) are taxed at the ordinary income tax rate. Long term capital gains (366 days +) fall into one of three progressive tax brackets, each of which having a lower tax rate than the short term.
The rates change based on your earnings and your marital status, but you always pay lower rates on long term capital gains. Use this knowledge to plan your investing accordingly.