There’s a reason accountants tend to be boring. It’s because we like it that way. When things get exciting in the accounting world, it’s usually because something went wrong. The same is true when filing your own personal taxes. Here are some tips to help make sure your tax returns get filed without any excitement.
Nothing helps more than keeping all of your financial records organized. Know where all of your sources of income are generated and keep track of them during the year. This way you will know who will be sending you a 1099 or W2 and what it is for. When those tax documents start to arrive in January, match the totals to what you were expecting and make sure the number is right. Mistakes do happen and it’s better to correct them early on.
No one knows your personal financial situation better than you. Be sure to review your pay stubs early in the year to make sure your employer has all of your deductions and withholdings correct. If you find out in December that your tax withholdings were too low, there’s not a lot you can do about it then. Check things like 401(k), flexible spending accounts and health insurance deductions. Review your state withholding. If you work for a large employer with multiple locations, make sure they are withholding the correct state. If you move to a different state during the year, make sure you see the change in your paycheck.
Some states have reciprocal agreements that allow employees who work in one state but live in another have their state of residency tax withheld. If you live in MD, NJ, PA, VA or the District of Columbia this could apply to you. Finding out you paid taxes to the wrong state all year long will not only lead to penalties and interest from the state you should have paid, but you could be waiting for months on the refund from the state you did pay the withholding to.
Most importantly, check your federal withholding. If your income doesn’t fluctuate, it’s easy to determine how much withholding you’ll have by the end of the year. Assuming your income hasn’t increased substantially you can compare that estimate to the total tax on your previous year’s return to see how close you will be.
Your year-end pay stub should be exactly what goes on your W2. If you’re commission based or self employed, you’ll need to track the total on a monthly basis to see where you are. If your income is up or down substantially, make sure your withholdings or estimated tax payments match. Income tax withholdings are based on the status and exemptions you select on your W4.
Remember, the tax tables don’t know if you got married, got divorced, had a child or bought a house. If you feel like something has happened in your life that will impact your taxes, ask the question early on to make sure you are prepared.
Once you have all of your tax documents together, the next question is how to prepare and file your taxes. Is it a challenge you want to take on yourself or are you better suited to seek the help of a tax professional? If you’re good with numbers and your return is straight forward, (W2 and mortgage 1098) then using tax software and preparing your own return is an option. However, if your income situation is a little more complicated, (self employed, rental properties, or multi state income), a paid tax preparer is probably the way to go.
When using a professional, there are a few things to keep in mind. When you sign the return, you are confirming that the information on it is correct. If your tax preparer is encouraging you to take deductions that are overly aggressive or flat out didn’t happen, don’t sign that return and find a new preparer immediately. File an extension if necessary, but do not send in a tax return that you know is not accurate. Also, make sure the refund you receive matches what the tax return says. If it is any different find out why. The IRS is not in the business of giving money away, and if they realize you received money in error, they’re going to want it back.
While each of these topics could be expanded into separate articles, it’s important to take away the basic concepts. Tax planning isn’t something you do once a year; it is a year round process. Make sure you understand where all of the numbers are coming from and what they mean. If it’s over your head, find someone who you trust that can help you. However, don’t rely too heavily on someone to handle your finances. Your tax preparer most likely has 300 other clients they have to worry about, and they can’t remember everything pertaining to your personal situation. It’s your responsibility to make sure you meet all of the deadlines. When it comes to taxes, get organized, keep it simple, and strive to be boring!