It's tax time! Most employers will send employee’s W-2’s out by the end of January. Now is the time to start getting ready to file your taxes. According to Forbes, approximately 7 million U.S. Taxpayers fail to file required income tax returns each year.
Instead, stay organized and get a head start on filing your taxes to make them easier to do and help avoid fraudulent scams. Here are 8 ways to prepare. If you have any questions, it's best to ask a tax advisor.
- Review Your Filing Status – The status of your filing can impact how much you owe each year and whether or not you have to file at all. It’s important to know if your filing status will or has changed during the year. For example, if there was a change in your marital status this year it could switch your filing from single to joint.
- Select How Much Tax to Withhold - If you received a large refund on your return last year, it could mean your employer is withholding a large amount from your paychecks. If you chose to decrease the withholding, it could give you access to more of your money throughout the year. It’s all a matter of preference. It’s important to meet with your payroll manager to review your withholding allowances on your W-4 form.
- Establish Your System – There are a number of ways to organize your records, but it’s important to have a filing system that works for you and has all the documents you need in one place. Avoid waiting until the last minute to organize your important documents, instead keep all information in a safe place. Check out NerdWallet’s Tax Prep Checklist for guidance.
- Save Tax Deductible Information – Do you own your own business or plan to itemize your deductions? If so, you should hold onto your receipts and other documents for eligible expenses. You don't have to send in your receipts with your tax return, but you might need them if the IRS checks your return. The same can be done for home improvements, especially if you plan to sell your home.
- Track Your Charitable Contributions – Doing good for others really does payoff – you may receive a tax benefit. You can include charitable contributions to qualified organizations in your itemized deduction, but this may require extra documentation. It’s important to keep good records of all your charitable contributions to qualified organizations throughout the year.
- Plan for Estimated Taxes – Underpaying taxes throughout the year can have negative consequences. If you expect to owe $1,000 or more in taxes when you file, the IRS generally requires you make estimated tax payments throughout the year. This is especially important for business owners or self-employed individuals who generally don’t pay income taxes on their earnings. It could be wise to work with an accountant to determine how much you should set aside and pay each quarter.
- Don’t Bank on Potential Tax Breaks – The IRS offers some tax credits and deductions that can potentially reduce your tax liability. But, if you spend more just for the purpose of a tax break, you may end up losing money. It’s important to familiarize yourself with new tax rules.
- Avoid Tax Scams - Taxpayers should be on the lookout for tax-related scams. Scams related to Social Security numbers are on the rise. Scammers claim to be able to suspend or cancel your SSN. It’s an attempt by con artists to frighten you into returning ‘robocall’ voicemails. If you receive a call threatening to suspend your SSN for an unpaid tax bill, just hang up.
A large number of taxpayers consider filing taxes a stressful experience, but it doesn’t have to be. By staying organized throughout the year, you can make the process much easier. The sooner you start, the more accurate your filing will be.
Keep a copy of your tax return and related documents for at least three years. This is in case the tax agencies need them. For more information about filing, visit irs.gov.