With tax season right around the corner, it’s a perfect time to start making plans. Although many individuals and businesses wait until the first of April to start attacking those tax returns, the best thing to do is prepare ahead of time. In fact, several financial planners often recommend to their clients that a good New Year’s Resolution is to start working on tax returns at the beginning of the New Year.
Set Aside Time
One of the most important tips to help you prepare for tax season is to set aside time to get everything together. Nothing is more frustrating than trying to find everything you need when the tax return is due in a couple of days. It’s important not to put it off until the last minute. Also, when you set aside time to gather the information you need, you can break everything down into smaller parts. One evening, you might want to just gather receipts. The next night you might want to put those receipts into their appropriate categories. Following that, you might want to sit down and examine your assets. By working this way, you’re less likely to burn yourself out on the project and less likely to make costly mistakes or oversights.
Have a System
Another of the tips to help you prepare for tax season is to make sure you’ve got a system in place to handle your documentation. Many preparers tell their clients to use manila envelopes that are labeled according to their contents — medical receipts, equipment, car rentals, charitable receipts, etc. If you create the manila envelopes at the beginning of the year and they are accessible throughout the year, you can regularly put the appropriate receipts in them. Then, when tax time comes around, you’re a step ahead.
How long should you keep tax information and tax returns? The traditional timeframe is 7 years, however, if the IRS is concerned about fraud or illegal activities, the number of years they may request is unlimited.
Analyze Your Finances
You’ll need to look at your finances when you’re working on your tax returns. Make sure you know where all your assets are, and what they are. If you have stocks or bonds or any additional sources of income, you’ll need to account for them on your tax return. All assets and income sources come into play when tax season rolls around.
It’s also prudent to evaluate your level of income and what tax bracket you fall into. If you are an employee with W-2 earnings, verify your W-4 status and that you are withholding at the right level. The goal is to reduce the potential for both a tax bill and a tax refund to zero, or as close to it. (See the average number of hours you work to pay your taxes per day: http://blog.turbotax.intuit.com/2012/10/11/how-long-americans-work-to-pay-their-taxes-infographic/) If you are a self-employed person, make sure you are making timely tax deposits to avoid costly penalties and fees.
One of the most important tips to help you prepare for tax season is making sure you ask questions. You know the tax code is not something easily deciphered. At times, it seems to be deliberately complicated. If there’s something you don’t understand, go to a financial professional or talk to a tax specialist.
Keep Current with Tax Law
The tax code constantly changes. Every year there are shifts in what is deductible and what isn’t deductible. Unless you’re someone who happens to be knowledgeable in changes within the tax code, you should consider asking for assistance from a tax professional or visit the Interactive Tax Assistant on the IRS website.
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