Thursday, January 27, 2011

5 Ways to Prepare and Organize Yourself for the Dreaded Tax Season

You've probably heard the saying, "The best defense is a good offense." This is a relevant saying when it comes to preparing for the dreaded tax season. For those who lose sleep as the April 15th tax filing deadline looms, it's especially important to do a bit of homework throughout the year to save you from months of anxiety leading up to April 15th.

Here are five ways to prepare and organize yourself for the dreaded tax season.

1. Divide and conquer.

Fortune 500 companies are obligated by the U.S. Securities and Exchange Commission (SEC) to submit quarterly financial reports to keep shareholders and other relevant players abreast of their performance throughout the year. Take a cue from these successful companies and divide your year into seasons (instead of financial quarters) to keep better track of your finances throughout the year.

In summer, organize your records. Make sure your filing system is up to snuff and is complete with updated records.

In autumn, estimate what your annual income will look like at the end of the year, as well as your taxable income. You should be able to estimate your taxable income, so you know if you're behind on tax payments.

In winter, prepare to file your tax return. Make sure needed records are complete and readily available. Also, gather any tax forms you'll need. Separate pertinent receipts from those you won't need.

In spring, file your taxes! If you've followed the guidelines above, this should be a breeze.

2. Keep good records.

This may seem redundant, but it can't be emphasized enough. If you keep good records throughout the year, you'll have an easier time come tax season. Additionally, keep certain types of documents secure: birth certificates, wills, deeds, and bond or stock certificates.

3. Adjust your W4 to reflect appropriate withholding.

There's a school of thought that believes that if you're paying too much taxes throughout the year (even if you get a large refund at the end of the year) you're actually giving the government a free loan! This is because you could be saving the difference each month to put into a savings account that's earning you interest instead. However, if you lack self-discipline, you might want to think of receiving a tax refund as a forced savings plan. Whether you'd rather adjust your W4 to get a refund or pay as little as possible toward taxes each month to maximize your income and minimize the taxes paid is up to you.

4. Keep receipts.

Keeping receipts will give you ammunition if you get audited. Pertinent receipts include paycheck stubs, 1099 or W2 forms, receipts for deductible items, records of charitable donations, and medical and insurance documents, among others.

You can also use software like NeatDesk to electronically keep track of your receipts, too.

5. Pay your taxes before April 15th.

The IRS charges penalties if you don't pay estimated taxes throughout the year. Therefore, adjust your W4 withholding amount appropriately during the year to keep the IRS at bay. If you're unsure how much to withhold, use turbo tax coupons to get affordable help with your taxes.

With a little forethought and basic record-keeping skills, you'll feel prepared to file your taxes come April 15th.

No comments: