How can I prepare for tax season?
Ready or not… here it comes! I totally understand why many Americans loathe tax season.
It’s a tedious process of gathering documents, filling out forms, and paying money to Uncle Sam.
Still, it has to be done each year… so here are some suggestions that might help your tax planning process.
Review your W-4 Annually.
Understand how your W-4 can impact your finances. The goal is to find the sweet spot: when you owe nothing to the IRS and they owe nothing to you.
Every time you get a big refund, you let the IRS use your money interest-free for an entire year. Yikes!
Self-employed? Be Vigilant.
Chances are, you probably don’t have automatic withholdings from your paychecks.
It’s important to estimate your tax liabilities and make quarterly payments. If you owe too much at the end of the year, the IRS will penalize you.
Extensions don’t apply to paying taxes.
If you’re not ready to file by April 15th, you can get an extension for up to 6 months.
Be careful though, filing for an extension doesn’t mean you have an extra 6 months to pay your taxes.
All taxes are due by April 15th.
How to lower your chances of an audit:
Being audited is a major headache that could cost you a lot of time and money.
Here’s what you can do to help yourself:
- Keep accurate records and receipts if you’re itemizing your deductions.
- Double-check your numbers. A silly mistake can cost you in taxes, penalties, and interest.
- Deduct carefully. Claiming deductions can save you money, but if you do it wrong, prepare to pay.
- Value donations fairly. If you donate goods, it’s up to you to estimate their actual value.
- Be realistic and average. When in doubt, avoid estimating deductions or rounding up.
Deductions vs. Credits:
Tax deductions and credits can reduce the amount of taxes you pay. Deductions offset your taxable income, while credits give you dollar for dollar tax savings if you qualify.
Here are some examples of each:
- Deductions: Self-employment expenses, capital losses, charitable donations, interest on primary residence mortgage and/or student loans, etc.
- Tax Credits: Earned income tax credit, child tax credit, child and dependent care credit, premium tax credit, American opportunity tax credit, the lifetime learning credit, etc.
Truth is, most of us don’t understand the tax code. That’s why working with an experienced professional is the best way to maximize deductions, focus on the right kinds of income, invest in tax-advantageous vehicles, and avoid big tax traps.
Let’s crush this tax season!