3 Ways to Make Filing Next Year's Tax Return Less Taxing
By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
April 16th is here. The blossoms are budding on the trees, the birds are beginning to chirp and, of course, CPAs and tax preparers everywhere are coming out of a 2 ½ month hibernation. Tax season is officially over. With that in mind, taxes may be the last thing you want to talk about right now, but with the sting of this year’s tax season still fresh, now’s the time to start thinking about a few easy steps to help make next year’s tax season a little less... well… taxing! Here are three such steps you might want to consider.
1. Plan Ahead for Next Year and Beyond
If you weren’t happy with your 2013 tax bill, the best way to make sure you don’t feel the same way again next year is by planning ahead. Here’s the rub in a nut shell, tax planning and tax preparation are not the same thing. Tax preparation tallies up your income, deductions, exemptions, credits, etc. and calculates the amount of tax you owe. That’s not to say it’s not valuable, but theoretically it should not change your tax liability, it should just report your taxes accurately and properly. Tax planning, on the other hand, can help you change your tax liability, but generally only prospectively, that is to say, in the future. Common tax planning strategies include tax loss harvesting, investing in assets that have tax-favorable characteristics, retirement plan contributions and Roth conversions (caution – Roth conversions will generally increase your tax bill for next year, but could reduce it for the long-term).
2. Make Estimated Tax Payments
The shock of a large tax bill is often hard to swallow. One way to soften this blow is by making estimated tax payments throughout the year or by increasing withholdings from your salary, pension or other eligible sources. In addition to being more palatable than one giant lump-sum tax payment in April, doing so may actually help you lower your overall tax bill by avoiding estimated tax penalties. While this may lead to you overpaying your taxes, it can be worth it. Now there are many articles that discuss why overpaying your taxes throughout the year and getting a refund is bad, and they generally have a very valid dollars and cents argument. There’s no financial benefit to overpaying your taxes throughout the year because Uncle Sam does not give you any interest on those amounts. However, not everything is always a dollars and cents issue. For many people, paying in smaller amounts each month is simply easier to stomach than a giant check in April made out to their least favorite Uncle. If the end result is an overpayment, a refund check isn’t the worst thing in the world, even if it was an interest-free loan to the government.
3. Keep Better Records
Time and time again, those with better records pay less tax. It’s best to start your new and improved system of tax organization at the beginning of the year for obvious reasons, but without any real motivation, sometimes that just isn’t a reality. Now that you’ve just filed your taxes though, that motivation is probably at an all-time high for the year. Think about it, wouldn’t filing those taxes have been easier if you had better records and were more organized. If someone else prepares your taxes, organization can save you not just time, but money. If you have your ducks in a row, that means less time your CPA or tax preparer needs to spend digging for info, which should mean a lower rate to prepare your return. So at the very least here’s what to do for the rest of this year… every time you get anything tax-related, throw it in a folder. Even if that folder, itself, is not organized, at least all your info will be in one place. That’s a good starting point and one that is sure to save you at least a few headaches.
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