Did you end up owing a boatload of money to the IRS at tax time without having the money to pay for it, or did you receive a large refund? While the former is a lot more unpleasant than the latter, they are both symptoms of bad tax planning. A big refund feels good until you realize that refund represents an interest-free loan that you gave the government.
Those are just a couple of examples of tax filing mishaps. Maybe you had other issues — you ended up filing your taxes late because of bad organization or mistakes on your form, or you simply waited too long to get started. In any case, your tax filing experience was less than pleasant.
Regardless of why your 2014 tax year filing did not go as planned, you can take some steps now to insure 2015 is not equally difficult. Consider these helpful hints:
- Organize Your Records – Keep all of your potentially relevant tax information organized throughout the year, instead of shuffling through a shoebox full of crumpled receipts on April 15th. Develop an organizer that allows you to file and categorize receipts when they arrive. Do not let things pile up.
- Consider Itemizing Deductions/Taking Credits – People often do not bother to itemize because they do not take the time to look over the list of deductions, or keep the receipts necessary to prove the deductions. Taking the advice above solves the second issue, and the first one can be resolved by checking the itemized deductions at http://www.irs.gov/Credits-&-Deductions. Look them over early in the year so that you know which receipts to save.
While you are at it, look over the tax credits on the same page and see if you will qualify for any of them over the next year. Tax credits are preferable to deductions because they subtract directly from your tax bill. Deductions reduce your income and therefore only subtract the amount based on your tax bracket — in other words, in the 25% tax bracket your taxes are reduced $25 by a $100 deduction and $100 by a $100 tax credit.
- Reduce Your AGI – Adjusted Gross Income (AGI) is the basis on which your taxes are calculated. Reducing your AGI can have an added effect on reducing your taxes, as they also form the threshold values for many different deductions.
All of the "above-the-line" deductions on your 1040 form (lines 23-35) reduce your AGI and you can take those deductions whether you itemize or not. They include health savings account (HSA) deductions, self-employment health insurance, certain moving expenses, IRA deductions and student loan interest deductions.
You can also reduce your AGI by maxing out your contributions to 401(k) plans and other employment-based retirement plans. Your money is tax-deferred and your retirement funds are increased — a win-win situation.
- Adjust Withholding – Generally, to make the most of your money, you should adjust your withholding amount to leave you with no refund and a small tax payment. Consider adjusting the withholding on your W-4 form with your employer. You may also need to adjust mid-year, based on any life changes such as marriage or the birth of a child. A withholding calculator may be found on the IRS website through http://www.irs.gov/Individuals/IRS-Withholding-Calculator.
W-4 changes take effect on the next payroll period after the change, so make any necessary changes early in the tax year.
One final tip that is related to 2016 — start early. As soon as you get all of your W-2s, 1099s and other relevant tax information, get your taxes filled out early. You do not have to pay early — but taking the time to do your taxes early will relieve stress and reduce the likelihood of mistakes. If you thrive on the adrenaline rush of filing your taxes at 11:59 pm on April 15th, we suggest finding a less risky method of getting your kicks.