Tax Season Will Be Here Before You Know It. Will You Be Ready?
It's October, and we're more than five months away from the IRS' official tax deadline, so it's understandable that taxes likely haven't consumed your thoughts lately.
However, doing some tax planning in advance can make your life much easier when tax season rolls around after New Year's Day. Think back to when you filed your return this past year. How much of a hassle was it to get all of your paperwork together? Did you lose out on any possible deductions because you lost receipts or simply forgot about some purchases? Or worse, did you find your taxes so overwhelming that you paid someone else to do them for you?
Here are three things you can do right now that will make the upcoming tax season much easier for you.
Figure out what deductions you'll qualify for
Surprisingly, many taxpayers don't take all the deductions to which they are legally entitled. Either they don't think they'll qualify for them, or they don't know about the deductions in the first place.
According to a list of the most overlooked tax deductions published by Turbo Tax, many people who take the standard deduction are short-changing themselves. For example, you can write off the greater of your state income tax or the state sales taxes you pay throughout the year. And many people, especially in states with no income taxes, forget about this one.
Or, if your parents paid your student loans, you can still write off the interest paid on your tax return. And even if you took just one class to further your education, you may still qualify for a tuition deduction.
There are hundreds of potential deductions that may apply to you, so here are lists from U.S. News, Turbo Tax, and Bankrate to help get you started. Or better yet, invest in a good reference book like this one. If you even find one extra deduction, it'll be well worth the $20 or so it costs and the time you spend flipping through the book.
Spend a rainy day getting your paperwork in order
If you spend some time and organize your tax documentation, you'll definitely be thankful you did.
First, receipts can be difficult to find when tax time finally rolls around. Instead of scrambling to find a receipt from August when the deadline approaches next April, make sure you have your paperwork together now. It is usually easier to have a business reprint a receipt before too much time has passed, and worse yet, you might forget about the deductible expense entirely when tax time rolls around.
And if your tax documentation isn't well-organized, there's no time like the present to get started. Make sure you have a decent system for keeping your paperwork in order. When tax time rolls around, answering a question like "How many charitable deductions do I have?" should be a simple matter of grabbing a short stack of receipts -- not an hour-long process of sorting through a filing cabinet. My fellow writer Dayana Yochim wrote a great article with detailed suggestions for starting and maintaining a filing system.
Finally, if you're like me and find it easier to keep electronic records, scanning your paperwork and creating a filing system on your computer is an efficient (and possibly safer) option.
Become familiar with the changes in the tax law and plan accordingly
Many people first learn about changes in the tax law when they start preparing their returns. The problem with this is that if there is a significant change affecting you, it may be too late to document your eligibility or do anything about it.
For example, the tax penalties for not having health insurance will change significantly over the next few tax years, increasing from $95 or 1% of income in 2014 to $695 or 2.5% of income in 2016. Further, the threshold for medical expenses has risen from 7.5% of your income to 10%, unless you or your spouse is over 65.
Several other tax breaks expired at the end of 2013, such as the deduction for mortgage insurance premiums, so it may be worth looking into now. TaxAct maintains a pretty up-to-date list of recent tax law changes, both good and bad. And it's likely that some more changes will come over the next few months, so you should take a look regularly.
Don't wait until the last minute
The main point here is that tax planning should be a continual process throughout the year, not just something you do on the first weekend of April. A little advance planning can make your life much easier when tax season rolls around, so spending a couple of hours on your tax planning every month or so is a very good idea.
Take advantage of this little-known tax "loophole"
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