The April 15 tax deadline is closing in and the exercise of filing your return can be stress-inducing even if you’ve done it for years. To ease your tension and lower your 2013 and 2014 taxes, try these five strategies:
Strategy No. 1: Get organized. Whether you’ll be completing your own return or hiring a pro, turn your mass (mess?) of financial records into a coherent arrangement that will let you see if you have every document you need.
Otherwise, you might fail to report to the Internal Revenue Service all the 2013 income, interest or dividends you earned. Then you could be hit with IRS penalties and interest or, worse, find yourself targeted for a tax audit.
(MORE: How to Claim Tax Breaks for Supporting Your Parents)
So pull out a copy of your 2012 tax return and make a list of every income source you reported on it. Then, make sure you have all the documents — 1099s, W-2s, interest statements — that align with these sources for 2013.
If you made new investments last year or earned income from any new employers, be certain you have those records, too.
Create a desktop folder on your computer and fill it with all the tax statement PDFs you received online from your bank, broker and mutual funds.
To double check that you haven’t missed any 2013 expenses you can write off or income you need to include, you might want to consult an online tax checklist, such as the one on the H&R Block site. Or you could download a tax software program that'll ask you questions to jog your memory about things you purchased that could slim your tax bill.
Strategy No. 2: Seize every opportunity to lower your taxes due to work. The federal tax code is filled with opportunities to claim tax credits and deductions for the self-employed and employees. Take the time to track them down.
If you’re self-employed, there’s still time to open and fund an SEP IRA (Simplified Employee Pension Individual Retirement Account) for 2013. That’ll lower your ’13 taxes and defer taxes on investment gains in the future. You can invest up to 25 percent of your self-employment income or $50,000, whichever is less.
You may want to get guidance from a financial adviser before setting up an SEP IRA, to be sure you don’t run afoul of the rules.
(MORE: Secrets of Claiming a Home Office Deduction)
If you have a side enterprise, you may be able to write off many of its costs including, perhaps, home-office deductions. Just be sure the IRS will view it as a true business and not just a hobby: You needed to have a reasonable expectation of earning a profit. The IRS presumes that's true if you made a profit in at least three of the last five years.
If you work for a company and used a flexible spending account to help pay for health care or child care expenses last year, the amounts you contributed to the accounts won’t be taxed. So your 2013 taxable earnings may be less than you think. For 2014, you can put up to $6,550 in a family health care flexible spending account ($7,550 if you're 55 or older), if your employer offers this benefit. Just remember that you’ll forfeit any amount you contribute but don’t spend.
Strategy No. 3: Review your tax return’s figures to avoid IRS red flags. It’s never fun to see an envelope from the IRS in your mailbox. I’m a financial adviser and one of my clients received an IRS notice saying his entire child care deduction had been disallowed because he’d rounded it up by $15. It took months of tedious correspondence to clear up the issue.
Double checking your tax return for accuracy helps in two ways.
First, it limits the likelihood of problems like my client’s and inadvertent red flags that might trigger an audit. Second, if you’re expecting a refund, you’ll receive it faster.
Your return could set off alarm bells at the IRS if the work-related deductions you claim seem way out of line for others in your profession with incomes like yours. So don’t go overboard with these write-offs.
If you’ll be claiming a charitable contribution that might seem unusual to the IRS or is much different from the donations you’ve written off in previous years, get an explanation in writing and attach it to your return.
When I renovated my kitchen, I gave my old kitchen cabinetry and appliances to a local youth club. Since this was a fairly large and one-time charitable contribution, I attached a letter from the organization to my tax return to head off potential questions.
Strategy No. 4: Don't go it alone. If you're confused about completing any portion of your tax return, don't wing it. Call in a trained tax preparer for assistance.
(MORE: Can You Claim Your Adult Children on Your Taxes?)
You may be able to get free tax help locally in one of three ways:
- The IRS’s Volunteer Tax Assistance program offers free tax prep support to people earning less than $52,000 annually.
- Tax Assistance for the Elderly, another IRS-sponsored program, provides free tax service for those age 60 and older.
- Tax-Aide, sponsored by the AARP Foundation in cooperation with the IRS, assists older, low- to moderate-income taxpayers; there are no specific income or age thresholds, though special attention is given to people 60 and older.
Chances are that one or more of these programs are available near you. Check with your town hall, library or community or senior center.
Strategy No. 5: Pave the road for an easier tax season in 2015. While you're wrestling with your current taxes, think about how great it would feel if you were better prepared next year at this time.
The key is to begin adopting smarter methods to keep your tax records organized.
You could go the low-tech way, collecting receipts in a basket with envelopes marked for specific tax categories, like investments, medical expenses and work expenses.
Or if you’re comfortable with technology, scan into your computer any paperwork that’ll help you take tax deductions and credits (like receipts and charitable contribution confirmations).
Saving these files to an online storage or cloud system will help ensure that your documents will survive if your computer crashes, another stress you don’t need.
Barbara Taylor is a financial adviser and ING Retirement Coach with ING Financial Partners.