I know what you’re thinking: the confetti is still falling from New Year’s Eve 2017, and the year is just getting started, so why would we want to discuss taxes? It’s actually the perfect time to start preparing for tax day so you won’t be scrambling and rushing come April. In fact, tax preparers and CPAs get so busy the closer to April 15 (or 16th, etc.), they barely have time to sleep, yet alone commit extra time to help you get organized.
The beginning of the year is also the time employers send out 1099s, so it’s the perfect opportunity to gather income numbers, add up all your receipts, expenses, and contributions for the previous year, and be locked and loaded to set an early appointment with your professional tax preparer, ensuring you’ll write a check to Uncle Sam for as little as legally possible.
Here are some easy ideas to get the jump on taxes before the month of April showers.
Disclaimer: we are not CPAs (nor do we play them on TV); this is just helpful information and not professional advice. Consider these to be a guideline for your conversation with a tax preparer because there are hundreds of pages of updates every year!
1. File Early.
Don’t wait! Maybe you are dreading it because you may have a big tax bill to pay, but dodging the big deadline is the worst thing you can do. Even if you file and send in only $1 or request a payment plan, by filing early, you’ll avoid the madness and late fees.
About 25% of taxpayers owe money to their state and the IRS, but no matter how early you file that money still isn’t due until April 18th, so you at least give yourself a little more time to budget and plan. Conversely, about 75% of filers receive a refund with the average check about $3,000, so if you file early (and electronically), your check will be in the mail while others are waiting.
2. Consider E-Filing.
Too many people still opt to file manually, whether with their CPA or by themselves, but e-filing is a far more convenient and error-proof process. You’ll save trees and process faster. Check this out: EF returns are accepted by the IRS with next day service once you submit. And here’s another secret we’ll cover in detail: a live IRS agent for audit rarely ever reviews them!
3. Think “E” to avoid the “A” word.
Not many people know that manual (or paper) returns have an average 20% error rate, while e-file returns only have about 1% in corrections! The biggest problem the IRS has is basic math that doesn’t add up on returns, a problem that occurs 99% on manual returns because e-filing software automates checks and balances.
Another big reason for audits is mistakes made by…the IRS! It’s true; each year the IRS receives about 100 million returns. To handle the workload, they hire legions of inexperienced, workers who file and organize paper returns manually with cave man system of tables, slots, and stamps. From there a tired, unmotivated temporary worker enters your return manually, so you can see how many errors occur in the outdated process.
4. Be proactive if you’ve had a life change.
Whether it’s the $1,000 Child Care Credit, Head of Household status, or Mortgage Interest Deduction, big life events almost always have tax implications.
If something big might change your status: a baby, marriage, lost a job, caring for elder parents, divorced, a big jump in your income or bought or sold a house, you want to know as soon as possible what that means tax-wise. Don’t forget to talk to your CPA about these big moves when they happen, as they will strategize your tax picture accordingly and you may be eligible for new deductions.
5. Track your business expenses like a hawk.
People frequently leave legitimate business expenses off of their returns. If you spend money on anything job related, it could qualify as a business expense. Even if you are not sure, keep track. As an extreme example, an exotic dancer won a suit against the IRS allowing her to write off her breast implants! So let that be the measure of what belongs on the write-off list.
6 Hire a quality tax preparer.
There are things you can skimp and save money on, and things you can’t. Brain surgery, parachutes, and a good tax preparer are all things where quality matters more than price. Avoid the seasonal shops that hire temporary workers and then close after tax time. It’s impossible to follow up if you get stuck with an audit. You’ll be on your own. Find a great CPA and form a long-term relationship – the results will save you far more dough over time.
7. Remember business expenses and your Schedule C.
Note to those who file a Schedule C form for business expenses; the IRS carefully reviews these. If your itemized deductions exceed the average at your income level, you could call unwanted attention to your earnings. For that reason, be extra cautious with home office and rental property deductions.
8. Charity is about giving back – but you may get something, too.
There are two reasons to give: one is that it’s the right thing to do and the other is a tax benefit. It is so worth it to track your noncash contributions for this reason. Whenever you give or drop off a bag at Goodwill, make sure to get a receipt and carefully fill it out with exactly what goods or monetary value was transferred.
Also, don’t forget about donations online or through PayPal – those count! Save your receipts on your computer and jot down the basic info in a spreadsheet you pop into your paperwork at the close of each year. However, remember that only non-profits that qualify for IRS eligibility will count, so check the IRS.gov website or ask your professional.
9. Contribute to retirement accounts.
If you want to gain a tax deduction on this year’s taxes for funding your qualified retirement account, like a 401K or similar plan, you’ll have to do it before December 31st. Keep in mind that you still have until April 15th to set up a new IRA or add money to your established IRA.
10. Maximize your Home Office Deduction.
Definitely take advantage of every legitimate expense from your home office when it comes time to file your taxes, but also double check. According to tax law, your home office is only eligible only if it is “exclusively and regularly” used for business purposes. That means square footage from your dining room table or the computer workstation in your bedroom doesn’t count. Consult with your tax professional to see what you need to make the most out of this deduction but overshoot it.
