Finances: How to Prepare to File Your Taxes
The process of gathering your financial information and filing your taxes is often a stressful event. Frequently, people just give their accountants a box of receipts and pray for the best. There are some things you can do to make filing your taxes less stressful and less costly.
How to Prepare to File Your Taxes
Filing taxes this year:
- Get some large envelopes and label each individually with your tax categories, such as income, contributions, mortgage/house, business receipts or medical bills. Then divide all of your documents into the various envelopes. As you put your document or receipt in the envelope, write the total for each receipt on the outside of the envelope and total each envelope after all of your documents are sorted. This will help you organize your records and come up with the category totals necessary for your tax return.
- If you are giving your taxes to a tax preparer, write up a sheet with all of your categories and totals. Give both the summary sheet and the envelopes to your tax preparer. Submitting your information in an organized manner should help cut down on your tax preparer bill.
- If you are filing on your own, definitely use a computerized system. There are several free online programs that provide basic service. You can also choose user-friendly systems that help you fill out your taxes in a question/interview format for a small fee.
What to do if you owe:
- The best thing you can do if you owe money on your taxes is to contribute to an IRA fund. You can contribute up to $5000 ($6000 if you are over age 50) for 2011. Most people will qualify for the deduction, but there are some income phase-outs that may exclude you. Just make sure you check into the rules first and then make the contribution by the April 17th, 2012.
- Compare what you are deducting in your state income taxes with the total you paid in sales taxes during the year (particularly if you made some large purchases). You can only deduct one or the other, so you want to make sure you take the largest deduction. Go to the IRS website at http://apps.irs.gov/app/stdc/ to estimate your sales taxes if you didn’t save all of your receipts.
- Look over your deductions. Could you write off a home office? Did you remember all of your charitable donations? Do you have unreimbursed business expenses? For ideas, you can look over the categories on Schedule A of your tax return and see if you have forgotten anything.
- Gather up some more envelopes and label them in advance. Then when you have receipts or documents to file, you already have a place for them.
- If you either owed money this year or are getting a huge refund, this means your withholdings are out of balance. Use the IRS withholding calculator at http://www.irs.gov/individuals/article/0,,id=96196,00.html . You can do this any time during the year to make sure you are on track with paying the right amount on your taxes.
- Maximize your retirement accounts. If you can contribute more to your 401k, do it! It always means less in taxes, more in long term savings.
What are some of your tax saving tips?
By Karen V. Hunter, CPA