5 Things to Do Now to Avoid Freaking Out Over Taxes in April
NEW YORK -- January is about halfway over, and that means tax day is a little more than three months away. If you want to avoid the first-week-in-April scramble, here's a look at the five things you should do now to prepare. With a little prep work, taxes won't be nearly as much of a headache as you think.
1. Start a folder or box for all documents, including paperwork for any deductions. "Most people have a lot of anxiety when it's time to start thinking about taxes, but it all boils down to one reason -- a lack of organization," says Ian Gillespie, creator of the iBank banking and budgeting app.
The simplest thing you can do in the New Year is to get out a file folder, write "Taxes 2014" on it, and start gathering your W2, any 1099s, your mortgage statement and more.
"You don't have to do anything with them besides getting them organized into one spot," he says.
%VIRTUAL-pullquote-When you wait until the last minute to do everything, you never know whether or not you're going to owe money.%With taxes, it all comes down to proper documentation, says Kay Bell, contributing tax editor for BankRate.com.
"Are you going to make claims for credits and deductions? Did you give things to charity? Are you going to get home-related tax breaks? You've got to be on the lookout for all the paperwork and start gathering receipts," Bell says. "If you deduct something but don't have the records, the IRS can automatically disallow that deduction."
Don't forget to gather information from your spouse, and from anyone you may claim as a dependent, including children or an older relative you may care for. You'll need their Social Security numbers and documentation on any expenses related to their care. For example, if you have a child in day care, make sure you have the child care facility's tax ID number, Bell says.
2. Keep an eye out for documents sent via the Postal Service and electronically. "If you have accounts that only send you communication electronically, make sure you print your tax documents, because you might not receive these in the mail," says Erin Ellis, personal finance expert at Philadelphia Federal Credit Union. "This might be the case for student loans, tuition expenses or any accounts where you do online banking."
Most people can expect to get at least some of their statements via email this year, Bell says.
"If you don't see anything, check your spam folder just in case," she cautions. "Double-check all your email accounts so when you go to complain that you didn't get it, you can be sure you didn't get it."
By law, issuers of tax documents have until the end of January to send out tax documents, Bell says. Since Jan. 31 falls on a Saturday this year, some documents may not make it to your door until Feb. 2.
"Most people are good about getting them to you before the deadline," Bell says. "If you left a job midyear, the company may have already sent you your W-2. Others may be in the mail now, as many companies close out payroll at the end of December and generate documents then."
If a company you worked for in 2014 has gone out of business, it may be more of a challenge to get your documentation in a timely manner.
"This is why it's important to start gathering your documents now. You've got a few months to chase down some things and make calls if you need to," she says.
3. Find last year's tax return. Always have last year's return handy, Ellis says.
"If you are preparing them yourself or going to a tax preparer, it can be helpful to use last year's as a reference," she says.
This is especially important for contract employees with more than one job or for people with multiple investments they may have sold or profited from in the last year.
"If you have investments you can see, 'Oh, I still own that stock,' or you may realize, 'Oh, I sold that one so I have to report the gains,' " Bell says. "If you're a contractor, you may have a recurring job every year that you forgot about."
Sometimes even seeing a job you no longer have on an old return can jog your memory about current sources of income, Bell stresses.
"You may look back and see, 'Well, this contract feel through, but I got another one to replace it,' " she says.
4. Start working on your taxes, even if you're using an accountant. If you're using your credit card statements to take an initial look at your 2014 expenses, now's the time to get them out and start circling relevant charges.
"You need to spend a few hours with it and say, 'OK, these were my business expenses, these were my charitable contributions,' and make sure everything looks OK," says Jason Steele, personal finance expert at CompareCards.com. "This process is the same whether you're using an accountant, filing yourself or using a software program. Even a skilled accountant won't be able to look at your statements and categorize your charges -- only you can do that."
When you inspect your documents early, you can easily head off any problems with missing forms or receipts, Gillespie says.
"That blank for 'charitable deductions' may jog your memory on something," he says. "You've still got enough time to hunt for something you put in a shoebox. But if you wait too long, you might miss out on some great deductions."
5. Think about next year, even if it's the last thing you want to do. Want to make a great New Year's resolution? Make tax season a year-round planning event, Gillespie suggests. Seriously.
"It's never too early to start thinking about next year. The reason so many people think of tax season as stressful is because of the all the unknowns. When you wait until the last minute to do everything, you never know whether or not you're going to owe money."
If you haven't already invested in financial management software, do so now, he recommends. You can use it for this year's taxes, and get a head start for next year.
"It really makes all the difference," he says.