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7 Tax Preparation Tips to Ease the Stress of Filing





December 25th and April 15th are two of the most memorable dates on the American calendar. The first is the culmination of a joyful season of celebration, gift-giving, and general goodwill, and is eagerly anticipated. The second date – the day income tax returns must be filed – is a day of dread, stress, anger, and fear for many people. Preparation for Christmas often begins in early autumn, while many people wait until the last minute to complete and file tax returns.

Despite the fact that three out of every four filers receive a refund, nobody likes income tax time. However, there are ways to make the experience less hectic and easier to endure.

How to More Easily File Your Income Tax Form

Whether you file your own taxes or use a professional preparer, the key to a satisfactory, tension-free result is organization. Trying to make sense of a rat’s nest of paper receipts, canceled checks, brokerage statements, and other miscellaneous bits of information is frustrating and time-consuming. The confusion adds time for you, and unnecessary expense if you are using a professional tax preparer. It also increases the probability of mistakes in determining the correct tax liability. If you pay too little, you may be subject to a tax audit and additional penalties; paying too much effectively gives a donation to the government that could have been returned to you in a refund. Avoid such troubles by following these tips.

1. Collect Pertinent Income and Expense Information

Around the end of January each year, employers, vendors, financial institutions, and others prepare and forward various forms and information pertinent to your filing. Create a set of files, whether a large multi-pocketed accordion file, a group of large manila envelopes, or a digital filing system on your hard drive to sort and separate the data into one of the following categories:

  • Personal Information. This information should include the legal names of who is filing and who is covered by the return (spouse and dependents). You need Social Security numbers and dates of birth as well. I also keep my primary bank information – account number and bank routing number – so I can request a direct deposit refund if circumstances warrant.
  • Income. Common forms include W-2s from employers, 1099 forms for other forms of income such as self-employment, investments, and retirement distributions, and K-1s for any partnerships in which you participate. Keep a special folder for security transactions so you can easily determine holding periods from buy and sell dates to ensure that you qualify for capital gains treatment wherever possible.
  • Personal Expenses (Deductions). While you will receive Form 5498 for IRA and health savings accounts contributions from vendors, and Form 1098 for home mortgage interest deductions, most of the information documenting allowable deductions such as business expenses, entertainment, or travel must be elicited from other financial documents such as check registers, cancelled checks, bank statements, and credit card statements. Download and print summaries of the prior year’s transactions for each credit card, and review each transaction to determine whether it may be deductible. I use a marker to highlight the transactions that may affect my filing for easy identification later. A similar culling process can be used with canceled checks.
  • Business Information. If you own a small business, perform freelancing jobs, or have other side income, you need to keep the business income and expense items separate from your personal information. There are some expenses that are deductible for a business, but not a personal filer. If you have questions about what type of information to save, review Schedule C of the 1040.

2. Review Tax Filings from Previous Years

For most people, the changes from one tax year to the next are relatively slight. Previous tax returns are great reminders of areas that can easily be overlooked, such as interest or dividends, capital loss carry-forward balances, and infrequently used deductions.

I keep paper copies as well as scanned copies of past year returns, in addition to four spreadsheets detailing the income and expenses for each year. One spreadsheet contains the information from Form 1040, while the others have previously filed data for Schedules A, C, and D. This format allows me to easily check whether I’ve overlooked an income or expense item, as well as the changes in the amounts that occur year to year. For example, if I had received dividends from one security holding or interest from a particular bank in prior years but the amount is missing or substantially changed for the current year, I know to check for the reason behind the omission, increase, or decrease before completing my tax filing.

Review Previous Years Tax Filing

3. Fund IRAs and SEPs to Allowable Limits

If you are participating in an employer-sponsored individual 401k plan, 403b retirement plan, or other qualified retirement plan, the deadline for contributions is December 31st. However, the opportunity to fund an IRA completely is available until April 15th. If you are younger than 50 years of age and have contributed less than $5,500 for the current year, or are older than 50 and have contributed less than $6,500, you can still invest money on a tax-sheltered basis for last year.

If some or all of your income is generated via self-employment, you can set up a simplified employee pension (SEP) IRA until the due date of your tax return (including extensions), and contribute up to 25% of your self-employment income. If you have the opportunity to choose between paying income taxes or funding your retirement, it should be an easy decision. While Roth IRA contributions are not deductible, IRA and SEP contributions are fully deductible depending upon your income, filing status, and participation in an employer plan. Income within a retirement plan – whether IRA, SEP, or Roth IRA – is not taxed until withdrawn.

4. Automate or Outsource Tax Calculation and Filing

While the IRS has made a significant effort to simplify tax forms and thus reduce the time and complexity of filing a tax return, it remains a daunting task, especially since it occurs only once per year and often is accompanied by a great deal of stress. Fortunately, a number of companies offer very sophisticated software programs to help filers complete the task quickly and relatively inexpensively.

Unless you are a masochist or enjoy spending hours with the tax code, a calculator, and a myriad of different tax forms, you should use one of the popular software programs from TurboTax, TaxACT, H&R Block, or other providers. The IRS even offers free tax filing software for taxpayers with an adjusted gross income of $58,000 or less. To determine whether you are eligible for the free software, just check last year’s return for your adjusted gross income (AGI) which appears on line 37 of Form 1040.

For those with incomes greater than $58,000, the IRS provides Free File fillable forms for electronic filing. However, the forms offer only basic guidance, so you must know how to do your taxes yourself. Most of the filing programs allow you to keep track of any refund due and select the method of payment you desire (direct deposit, paper check, or hold and apply for the coming year).

The decision to use a professional preparer, rather than a software program, should be based upon your income, the complexity of your return, unusual events that significantly affect your income or expenses, and your concern about a tax audit. In my experience, the difference between the better software programs and the typical preparer at a walk-in tax preparation office is minuscule. The typical software is very sophisticated and leads the filer through a series of detailed questions to verify amounts and the appropriate tax treatments; the typical store-front preparer is a seasonal, part-time employee whose training in tax preparation may be limited to a few hours of company-offered instruction. In either case, the quality of their work depends upon the information provided to them as a result of your diligence and earlier preparation.

Tax filers who should consult an experienced tax professional before filing taxes this year include those who:

  • Have a gross income greater than $150,000
  • Participate in complex investments that have tax preference or are managed through partnerships or private businesses
  • Experienced a significant change in either income or expense during the previous year, or a life-changing event such as the death of a spouse or partner, a divorce, marriage, bankruptcy, change in the number or status of dependents (such as caring for aged parents or a child moving back home), or retirement
  • Started or closed a full- or part-time business, purchased or sold a home, rented a home or room, or received or paid significant fines or penalties related to a lawsuit during the tax year
  • Are concerned that tax filing will trigger IRS scrutiny and a possible audit
  • Have concerns that calculations cannot be completed accurately and entirely

If you meet any of those descriptions, the cost of advice from a certified public accountant or tax attorney will be worth the peace of mind. It is fully tax-deductible (so long as the fees are in “connection with the determination, collection, or refund of any tax”), and may result in a lower tax liability. Readers should note that personal legal expenses for other purposes are considered “miscellaneous itemized deductions,” and are deductible in excess of 2% of AGI.

5. Do (a Little) Research

Since tax laws and interpretations are continually changing, every filer should attempt to be as informed as possible. Even if you are using a tax advisor, it is prudent to understand the tax issues and treatments that affect you as completely as possible in order to make the best decisions.

Spending an hour or two online researching specific taxable situations or conditions that are relevant to you is easy. For example, entering the term “freelance income” in a search engine reveals numerous sources about the tax treatment and filing of freelance income. A search of the term “home rental income” delivers a similar number of sources about the treatment of home rental income. You can never know too much about income taxes – after all, it is your money that you keep by minimizing your tax liability.

Outsource Tax Calculations

6. File Early

There are three good reasons to complete your filing as early as possible:

  1. Information Is Readily Available. Employers, vendors, and financial institutions are legally obligated to mail the required W-2s and 1099Rs by January 31st. Completing your taxes as soon as you have information prevents confusion, tension, and the loss of data.
  2. Filing Is Inevitable. It is a duty that is required every year – why procrastinate? Getting it behind you gives you time to focus on other things.
  3. You Can Invest Your Refund as Soon as Possible. It is your money and it is not earning interest in the government’s till. File your return and save the refund.

The one reason to delay filing until April 15th is because you owe taxes. If you have tax liabilities, the best approach is to complete the calculations and fill out all of the required forms, but delay the actual filing until April 15th. There is no penalty or interest charged if you file and remit any unpaid balance at that time.

7. Prepare for Next Year’s Tax Filing

While it is too late to affect the tax bill for this year, it is not too early to begin planning and making changes that might reduce your liability for the upcoming year. If you have a significant amount of unpaid taxes at the end of the year, an unusually large refund due, or you anticipate a significant change in income during the current year, consider reducing your withholding allowance so that more is collected from your paychecks during the year or, conversely, increasing the withholding allowance to have more money distributed to you each pay period. Of course, some people prefer to get a larger refund check, rather than a small increase in take-home income every pay period, because it is less tempting to spend and more likely to be saved.

If your employer offers flexible spending accounts for healthcare, childcare, or commuting expenses, take advantage of them early in the year. This allows you to pay those expenses with pre-tax dollars, rather than after-tax dollars.

Maintain your filing system for the current year, storing receipts and other information year-round which will be useful in filing income taxes next year. And remain diligent about keeping up with any news about investments or changes that might affect you tax-wise. Being forewarned is forearmed.

Final Word

Preparing for and paying taxes doesn’t have to be a hassle – it is the consequence we bring upon ourselves by procrastination and disorganization. Follow these tips and you will be able to spend the evening of April 15th at home in front of the television set after a nice meal instead of waiting in the automobile traffic in front of the post office.

Do you have any additional suggestions to make tax filing easier?

Michael Lewis
Michael R. Lewis is a retired corporate executive and entrepreneur. During his 40+ year career, Lewis created and sold ten different companies ranging from oil exploration to healthcare software. He has also been a Registered Investment Adviser with the SEC, a Principal of one of the larger management consulting firms in the country, and a Senior Vice President of the largest not-for-profit health insurer in the United States. Mike's articles on personal investments, business management, and the economy are available on several online publications. He's a father and grandfather, who also writes non-fiction and biographical pieces about growing up in the plains of West Texas - including The Storm.

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