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In our year-long series, How To Develop A Spending Plan, we’ve been talking about how to develop our monthly spending plan and the steps to ensure you’re covering all the bases each month. This process sets you up for success and helps you to build a plan based on what you value most.
This month we’re focusing on taxes and how to manage them without too much stress.
HOW TO DEVELOP A SPENDING PLAN – MARCH
Tax season is officially upon us. As much as we’d rather avoid this dreadful time of year, the best way to handle it is head-on. We can’t avoid it so we may as well tackle it.
Getting ready for tax season is almost more important than the filing itself. The more prepared you are, the better off you’ll be when it comes to finding deductions. It will also eliminate the need to go back and correct your tax forms after you’ve already filed, which will delay your refund or even cause you to owe money.
If your situation hasn’t changed much (same family structure, same income, same home, etc.) then your tax responsibility should be about the same. If you got a refund last year, you’ll most likely get one again. And if you owed money last year, unless you made payments toward your future tax bill over the past year, chances are you’ll owe again.
In order to get ready for tax season, here are a few things you should do to prepare:
The more organized you are, the easier it will be to file. Whether you’re filing yourself or hiring a tax professional, having all of your necessary documents in order will make it go faster and will allow you to find more deductions, meaning more money in your pocket.
Start a new file for each tax year to keep everything in one place, all of your income documents as well as a copy of your return. You can be audited for several years after a filing so keep your tax records for the past seven years. It’s also a handy way to refer back to the deductions you took in the previous years so you know what to look for this year.
Label your folder or envelope with the tax year and put all of your papers in it as they arrive. Your income statements from employers, bank interest statements, mortgage statements, healthcare documents, etc. You may also need to include receipts for travel expenses or child care expenses if they were work-related.
If you’re a freelancer, contractor, or small business owner, there may be other things you need like receipts for client expenses, meal expenses if they were business related and gas receipts. If you used your vehicle for business, you can also deduct regular maintenance expenses so have copies of those receipts. You’ll also want receipts for anything you purchased that was business related like computers and office furniture.
Take a look at last year’s return and see what deductions you were able to take. Chances are you’ll have those same deductions this year and you want to make sure you don’t miss anything. If you have a small business, this may be the last year you can claim some of those small business itemized deductions due to the new tax bill. Be sure you get every deduction possible while you still can.
If your situation has changed (new home, new job, new dependent) you may have deductions you weren’t able to take last year. Be sure to review the IRS website for potential deductions. The more you have, the more money will go back into your pocket. You can find answers to many of your questions right on their site.
Now that you’re organized, it’s time to think about filing. Your tax return must be postmarked by Tuesday, April 17th. You get a couple of extra days to file this year (2018) since the normal deadline falls on a weekend. But don’t procrastinate filing just because you have a little extra time. Filing late can mean penalties and interest. If you must file late, be sure to file your extension no later than April 17th. This will help you avoid those fees and penalties.
If you choose to file yourself, you can find all the forms you need right on the IRS website and you can download and print them for yourself. You can also e-file on their site.
If you feel you need some help finding all of your deductions but don’t want the expense of hiring a professional, you can use an online service like H&R Block and Free Tax USA. Their software is developed to ask you a large assortment of questions that can be related to your circumstances to help you find all the best deductions.
With luck, you should receive a refund. Even is it’s just a little bit, it’s better than having to pay. If you’re expecting a large refund though, make sure you have plans for how you will use it. It’s a great way to pay down debt or build an emergency fund.
If you find you’ll owe money this year, don’t despair; there are options. You can apply for a payment plan to help you pay it off a little at a time. Keep in mind though, penalties and interest will be added so you’ll end up paying more than you started out owing.
PLAN FOR NEXT YEAR NOW
If you found yourself owing money this year, help avoid the situation by paying in advance. Did you know you could do that? Yes, the IRS is always happy to take your money. You can make quarterly payments based on your 2018 tax bill. For instance, if you end up owing $2000, you can make a payment of $500 each quarter in 2018 to help subsidize your tax payment in 2019. If you’re self-employed or earn income from investments, this will make your annual tax bill a little easier to accept. Plus you’ll avoid the penalty for not making quarterly tax payments.
If questions, or problems, come up, visit the IRS Taxpayer Advocate Service to get help. There may be options available to you that you aren’t aware of.
While paying taxes is a necessary part of life that you can’t avoid, you can make it a little easier by being prepared and organized when it comes to tax season. Start gathering all of your documents as soon as they arrive in the mail and put them all together in one folder for easy access. Being prepared is half the battle to getting the best refund available.