Tax time gets a bad rap. Many people dread it, wait until the last minute and then hurriedly dig through stacks of paperwork, old receipts and feelings of mild panic. However, if you take the time to prepare and get organized, you can breeze through tax season like your favorite series on Netflix. Here are some tips to make tax time easier.
Keep Accurate Records
This is one of those times where an ounce of preparation can save you TONS of perspiration. Start a spreadsheet today and note all of your charitable donations, business, childcare and medical expenses. It will only take you a few minutes per day and will ensure that your records are complete and accurate. Also, in the unlikely event of an audit, you will already be prepared to show exactly what you deducted and why.
Designate a desk drawer that is only for tax-related items. This is where you can put your mortgage and student loan interest statements, any receipts you need to save and things like retirement account and social security statements. That way everything is already in one place and ready for April 15th!
Report ALL Income...Even From Those Side Hustles
These days it’s getting pretty hard to earn enough money from just one job to cover all the crazy expenses of living. Many younger people are picking up a few shifts at a coffee shop on the weekend, driving for Uber or working as a virtual assistant in their spare time. Even though you may think the earnings are “bonus” or nominal, it’s important to let the IRS know
about these income sources. If your employer doesn’t take out taxes because you are a 1099 contractor, it is imperative that you set aside 30-35% of each paycheck and put it in a savings account. It’s tempting to keep it all once you see that money in your pocket, so you may want to have a set percentage automatically deposited in the account reserved for that purpose. Failing to report income may cause your return to understate your tax liability and leave you open to penalties.
Max Out Your Retirement Plan Contributions
It is a smart and savvy practice to contribute enough to your 401K to capture your company match, if that is provided and you are financially secure enough to handle the deduction. Think of it as a guaranteed investment pay-off in your golden years! If you need more of an “instant gratification” reason, tax-deferred contributions to your 401K can be written off at tax time. By setting aside a portion of your pay before federal and state taxes are taken out, you will reduce your taxable income and pay less in income tax.
Many people do not have a company-sponsored retirement plan and choose instead to start their own Roth IRA. While this type of account will not reduce your current taxable income, like the 401K, Roth IRA earnings are not taxable if you keep them in the account until you are at least 59 ½ years old.
What if I Need Advice?
It is possible to tackle tax time with confidence and a smile! For more advice on how to become savvy about your finances, contact us for a Free Cents Savvy Consultation today.