For the past few years, I’ve resolved to do a better job keeping my tax documents in order. As hard as I try, no tax season has been without paperwork panic. While this admirable goal has never left me, I’ve recently came to realize, tax time organization is not about the destination, it’s about the journey. During this annual voyage, adjusting to the ever changing winds of the tax code can seem daunting. The good news is, by implementing just a few simple strategies, you can significantly smooth out any tax time turbulence.
1. Implement a one file system. Whether you love your paper filing cabinet or you prefer digital organization, create a one file system for each tax year. Within this file, throw any and everything you deem worthy of reporting to the IRS (or your CPA). If you’re like me, you may feel the urge to further tweak this file with a few sub-categories (for example, medical expenses and charitable donations). The goal is, come tax time, have 90% of everything in one spot.
2. Adjust your withholdings. For some, tax time means an anxiously awaited refund check, while for others it’s a jaw dropping tax bill. You may be thinking, “I’ll take a refund any day!”. While a refund may be your aim, unfortunately both of these outcomes are far from ideal. Its important to know, when you receive a refund you’ve paid too much in taxes and have essentially giving the government an interest free loan. Those who underpay, on the other hand, have not paid enough in taxes and may end up owing their tax bill plus any applicable penalties and interest. This is why, by the end of the year, your goal should be to get as close to zero as possible. One way to do this is to review your withholdings and make needed adjustments. If you’re having trouble calculating how much should be withheld, consider using the IRS Withholding Calculator, found here.
3. File early. Procrastination is one the greatest sources of tax time stress and one of the easiest to fix. It’s as simple as, filing early. For many, filing early equates to having to pay your tax bill early. This is a common misconception. Regardless of when you file, you always have until the filing deadline to pay any tax due without incurring late penalties. Additionally, filing early is a tremendous way to fight tax fraud. The sooner you file, the less likely a criminal will have time to potentially use your information to file a false return. If that’s not enough incentive, you’ll also save your CPA from overdosing on coffee, and that’s simply priceless.
- Written by Chelsea McLaughlin, Worley Erhart-Graves Financial Advisors