Written by Chad ZollingerChad Allen Zollinger is a Content Management Specialist for Best Company. Majoring in Writing Studies, Chad is an avid reader, a lifelong writer, and once completed the Rubik's Cube in 34 seconds.
(This article is 1 of 15 chapters in The Definitive Guide to IRS Debt Forgiveness. Return to the guide to get the full explanation of IRS Debt Forgiveness.)
Is it possible to eliminate the stress of your tax season? There's no way to know unless you try preparing to the fullest.
Even professional tax preparers sometimes have trouble keeping up with all of the necessary documents and information, so don't feel overwhelmed if you've run into a few roadblocks here and there.
Fortunately, there are great tips all over the internet (from tax professionals and taxpayers just like you), to help you maximize your deductions and prepare for next tax season.
- Eliminate Existing Tax Debt — First things first: get a head start on your tax debt. If you are completely free of tax debt, then you are in the clear and ready to begin your preparation for next year. If not, begin planning now to settle your debt. Though you may be unable to completely wipe out your tax debt before next tax season (depending on your total tax debt amount), the sooner you get tax relief, the better.
- IRS Tax Laws — Keep an eye on changing IRS tax laws. I know what you're thinking, that stuff is way too hard to understand, especially when trying to predict how it might affect your next year's tax filing. Yet, there are blogs, apps, and tax professionals dedicated to translating complicated tax terminology into something you can understand. Either take your CPA to lunch and ask for advice or download the Ask a Tax Preparer app to get answers to some of the most difficult questions in tax law.
- Tracking: Charitable Donations — You have to provide records of the transactions before receiving any sort of write-off. If you are planning on donating and itemizing your deductions, you should know that there are situations where you must keep written acknowledgments of your donation. For donations of $250, the recipient charity must give you a document detailing the donation amount and that you did not receive anything in return.
- Tax Expert: Consider Gifts — According to Conor Richardson, Founder of MillennialMoneyMakeover.com and author of Millennial Money Makeover, "Whether you are receiving or giving gifts, planning for the tax implication of the gift can alleviate potential taxes. For 2018, the annual gift exclusion is $15,000. This means if you expect to receive gifts up to this amount you can plan now to ensure you incur no tax liability. The gift exclusion is tremendously helpful if you are receiving help which large ticket items like purchasing a car, planning a wedding, buying a home, or receiving an inheritance."
- Prepare Your Personal Information — Find a safe place to write and store the Social Security Number (SSN) of each of your dependents, addresses of owned property, home move dates, property sale information (price bought, price sold, expenses, and dates), etc. Organizing this information beforehand will help you save time otherwise wasted on tracking down sometime hard-to-find details.
- Pay Penalties/File Extension — If you've already missed the deadline for filing a Federal tax extension, you may want to think about paying off your past tax debts and late payment fees. If you want to avoid such fees, there actually are several ways to avoid paying late fees if you didn't file your taxes on time.
- Spend Your Refund Wisely: Save It — Spending a tax refund is much more popular than putting it away for a rainy day because most people perceive a tax refund as "extra cash." The truth is that a tax refund is just the amount of money you overpaid on taxes. It's not extra money at all; it's the money you worked hard to save in the first place.
- Tax Expert: Match Last Year's Documents — According to David Steiner, Tax Advisor at Zebulon Tax Advisory, "The easiest way to assemble your tax documents, whether you use a tax professional or not, is to take last year's documents and match/look for this year's same documents. This means if you had a W-2 from ABC Company last year, you (should) have a W-2 from ABC Company this year. If you switched jobs, last year now you have two (2) W-2s, one from ABC Company and one from XYZ Company. This goes the same for your form 1099 which is bank interest and investment statements. In order to help our clients organize their data, we send out a personalized letter that uses last year's data (documents) and tells clients to bring in the same documents as this year. We do not send out generic tax organizers; this only confuses clients. Again, we only send out a 1-page slip sheet with the items they need to arrange their taxes. For example, for many clients, this sheet only has one (1) item listed; the W-2. All of our clients love this, as many have said that it takes them less than 10 minutes to gather everything up and put into a folder to bring to our office."
- Keep Records of Previous Tax Returns — The IRS advises you to keep your tax returns for the past three years, but it's safe to simply keep them on file as far back as you can. If you ever have the unfortunate experience of being audited by the IRS, you have all of your records organized and ready for examination. Preparation is always more impressive than a complete lack of organization.
- Try TaxSafe — TaxSafe is an affordable and unique way to prepare for the next tax season. Powered by Tax Defense Network, TaxSafe not only gives you free tax prep software and tax resolution discounts, it also monitors your credit, and works to protect your identity. Not many services provide tax, credit, and identity theft services all in one.
- Tax Expert: Separate Credit Cards — According to Stacy Caprio, owner of dealsscoop.com, "The easiest way to prepare for tax season in advance is to make sure you have a separate credit card for personal and business expenses. This way you don't have to sift through credit card bills for the whole year to organize your business expense section for tax returns, because at the end of the year it will already be in one place."
- Make a List of Income Sources — If you have multiple income sources, you may want to make a list of them. If you are already tracking income through a budget plan, try separating your income by the source to maintain maximum organization.
- Identify What Went Wrong — Keep track of minor and major annoyances during filing in order to avoid repeating the same mistakes next year.
- Save Every Tax Form — Place all W-2s, 1099s, and any other tax form you receive in the same safe place. Consider scanning all documents and storing them on a hard drive.
- Tax Expert: Review Statements for Deductible Transactions — According to Shan-Nel Simmons, owner and Tax Consultant at Nel's Tax Help, "It can be overwhelming looking through a year’s worth of transactions and trying to remember what happened during the year. But if you go through your bank and credit card statements just one a month, it is easier to remember the details of the transactions and retrieve any documents you might need for the transactions than waiting until the next year."
- Think about Changes in Filing Status — How will getting married affect your tax filing process? What happens if you get divorced? What happens when you have your first child? These are important to consider when preparing for next year's tax season.
- Protect Your Identity — Providing an Identity Protection PIN on your tax return will help prevent tax fraud connected to your SSN. If you have ever received an Identity Protection PIN, you must provide the IP PIN on every following year's tax return. Remember, this PIN will change every year, so you'll need to check the IRS website each year in order to receive the correct one.
- Make a List of Questions to Ask Your CPA — I recommend writing such questions down while you are filing for the current year; that way, you can avoid the same holdups and mistakes made on previous tax returns.
- Tax Expert: Business Owners Should Evaluate Entity Structure — According to Samuel V Hicks, CPA at SKSM, "This is a common discussion we’re having with clients this year. The question is whether to change the tax structure to take advantage of the new lower corporate tax rates or be a flow-thru entity with the new IRC Section 199A deduction. Evaluating the need for new assets is also a big topic, that should be addressed during the year. The ability to claim a first-year deduction for a large asset purchased has been expanded under the new tax law. This can be used for assets placed into service in 2018, some taxpayers wait until the end of the year to see the year’s results and what the net tax benefit would be for new asset purchases."
- Consider a Tax Extension — If you properly prepare for an upcoming tax season, it's very unlikely you will run out of time for filing. However, there are exceptions; one year's taxes can be much more complex than previous year's taxes. Be ready with the know-how to file a tax extension if you run out of time.
- Make an IRA Contribution — You can actually save quite a bit of money on your taxes by making an IRA contribution. According to Life Hacker, the "tax savings from making an IRA contribution can be enormous. If an employee who is in the 25 percent tax bracket contributes $5,000 to a traditional IRA, he will save $1,250 on his current tax bill."
- Create a Tax Information Tracking Method — Whether it's new accounting software, an app, or a simple binder and a self-made google spreadsheet, you need to keep track of tax information. Itemizing deductions, finding receipts, and tracking expenses can be one of the most stressful parts of tax season. Make sure you are keeping track and staying organized beforehand to make next year's taxes a walk in the park.
- Tax Expert: Scan Everything — According to Abby Eisenkraft, Tax and Financial Expert, we shouldn't be "so quick to toss receipts. While the new tax act disallows a number of expenses, Congress still has to clarify the new laws, and certain states may decouple and allow deductions the IRS will disallow. Best practice is to scan everything so you can reproduce any receipt should you be audited."
- Stay in Contact with Tax Professionals — Avoid those last minute tax questions. You should meet semi-regularly with your CPA or tax professional to ensure you aren't missing out on important information. It's also a good way to keep dedicated CPAs on their toes and aware of your tax status.
- Set Aside a Piece of Your Tax Refund — With tax season wrapped up, you may feel the temptation to kick back and relax until next year's taxes become a problem once again. However, it's not a bad idea to set aside an emergency fund for unexpected tax fees.
- Try the IRS2Go App — The IRS2Go app can help you get answers to complex tax questions. You can also check out your refund status, make payments, find free tax prep assistance, and sign up for expert tips. If you like what you get out of the IRS2Go app, there are many additional tax apps you can use to be prepared for the next tax season.
- Tax Expert: Medical Expense Deductions — According to Lou Haverty, CFA at Financial Analyst Insider, "One frequently missed deduction is the ability to deduct medical expenses. In the past, this was typically missed because it was unusual to qualify because it required medical expenses to exceed 10% of adjusted gross income. Under the new tax law, this has been reduced from 10% to 7.5% of adjusted gross income (for 2017 & 2018). This change probably most benefits those people in retirement since they are more likely to incur higher than expected medical expenses and may not earn as much as they did prior to retirement. But it could also help people that have unexpected medical expenses over the next year."
- Get a Personal Tax Preparer — Take your pick from the best tax prep software and services available.
- Try Bloomberg BNA's Quick Tax Reference App — This app allows subscribers access to federal, state, and international tax analysis tools, search features, and tax news.
- Look at Your Withholdings — According to The Washington Post, "it's worth visiting the IRS 2018 Withholding Calculator. Your taxes are likely going to be very different next year. It's better to check now than wait for a surprise (possibly a nasty one) next April." Those who examine their withholdings could discover whether their taxes will go up or down and what their approximate tax refund might be.
- Review Your Retirement Plan — If you can afford to contribute the maximum amount to your IRA allowed by the IRS, then you should seriously consider doing so. This is especially useful when your work offers a matching contribution. Reviewing your retirement plan will also allow you to review your distribution strategy before making withdrawals. According to Merrill Edge, "your distribution strategy may have significant tax time implications if you own a traditional IRA because taxes will be due at the time of withdrawal. As a result, taking a lump-sum distribution will result in a much heftier tax bill this year than taking a minimum distribution."
- Project Your Income — It can be difficult to predict what will happen in your career, but do your best to make income projections and plan accordingly for tax season.
- Estimate Your Taxes — There are many tools available for estimating your taxes next year. Some of the best tools can be found on the IRS website.
- Plan Your Charitable Donations — Make the right amount of charitable donations to qualify for the maximum charitable contribution deduction on next year's taxes.
- Create an IRS.gov Account — Creating an IRS.gov account will help you track your tax return, receive news about new tax laws that might affect your next tax return, provide you with many tax tools, and give you access to other important tax-related information.