Tips To Make Next Year’s Taxes Less Stressful

Most of us approach taxes as something to put off thinking about until absolutely necessary. Having just finished filing – or still putting some finishing touches on this years filing – most people want to lock up the part of their brain that deals with taxes until it needs to be brought out again next year. However, with a bit of forethought and preparation, you can make next year’s taxes go much more smoothly.

Get Organized - There’s no grand secret to filing taxes in an easy and efficient manner. It is just a simple matter of setting a system of organization and sticking too it. An old shoe box, while compact and useful, is not the most effective system for holding your financial info in an easy-to-access manner. We’ll look at a relatively bare bones system for keeping records that will come in handy when tax season rolls around again.

Receipts - Even if you do not get a single write-off for receipts, it is well worth your time to keep them - and keep them in logical order.

It allows you to find any receipts if they do become eligible for tax purposes; for example, the computer you buy in March could become a deduction if you launch a home business in December - but not if you don’t have a receipt. Even if you don’t start a business, you may donate that computer to a charity next year and you can use that receipt to set the value of the charitable deduction.

Pay Stubs and Invoices - You can file these the same way as above, but it is worth getting slightly more technical if you are going to take your taxes seriously. When you end up paying an unusually large tax bill or receiving a large return, you need to find out what caused it. Usually, you’ll find that the withholding was off all year, but that doesn’t help you when the bill comes due.

You simply need to file a new W-4 to make changes. There are also life changes that should automatically prompt you to file a new W-4, such as a marriage (or divorce), the birth of a child, a second job, a new house and so on.

Plan Your Deductions - There are all sorts of deductions for taxpayers, but too often we miss them by leaving things too late. For example, Christmas often gets people thinking about charitable contributions, but it also happens to be the month when spending on gifts eats up free cash. Instead, plan to give on a set schedule, whether monthly, quarterly, bi-annually - basically, whatever works for you. The same reasoning applies to all deductions that depend on a purchase or some action on the part of the taxpayer. This gives you a more realistic chance of actually claiming a deduction rather than merely planning to claim one.

Plan Your Investments, Too - Taxes are a consideration when investing, even though they shouldn’t be the most important consideration. If you are already in the market for stable income investments or even just saving up for retirement, do of course consider the tax advantages of certain approaches. Munis and government bonds can help high-tax, high-net-worth individuals. Similarly, plans like a tax-deferred 401K can help you sock away extra for retirement and reduce your taxable income now as a bonus.

Study Last Year’s Taxes - The best thing you can do to make next year’s taxes easier is to study last year’s taxes. What deductions did you max out? Which ones could have been bigger? What credits did you miss? Reviewing your tax return for missed opportunities will prompt you to be more aware of how your actions can impact your taxes – and that’s not a bad thing. It can also be useful to buy tax software so you can run “what if” scenarios using your return.

The Bottom Line - Nobody wants to be thinking of taxes when they’ve just finished with them for another year. However, if you get serious about keeping organized records, watching your withholding, planning your deductions and reviewing your tax returns, you’ll find that tax season becomes, if not exciting, at least bearable and easier to handle.

Source:  Investopedia

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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