The due date for filing your taxes is just around the corner, but making smart choices to optimize your tax filing strategy is a year-round financial habit. Don’t worry – if you’ve missed a few key tax strategies this year, you can still optimize your filing and learn ways to stay ahead of the game next year. Even if you still haven’t filed taxes, there are a few good habits you can incorporate right now to possibly help reduce your tax bill or increase your refund. Because everyone’s tax responsibility is unique, a locally certified tax preparation consultant may be able to steer you through the murky waters of the U.S. tax code to determine if you qualify for each of the money-saving, tax-preparation tips.
Ensure You Have All Dependents’ Information
For those who have minor children or are caretakers of dependent adults, it’s important to have all their documentation ready when it’s time to file taxes. Deductions for those with dependents include the Earned Income Tax Credit and the Dependent Child Credit, among others – and the IRS will not accept these credits without a valid Social Security number for each dependent.
You may also be eligible to deduct daycare or caretaker expenses form your gross income (the amount of money you actually earn), thereby reducing your adjusted gross income (what you actually pay taxes on). Check stubs, payment receipts for childcare or adult day care services, and even babysitting can quickly add up to a large deduction if you choose to itemize.
Weigh Standard Deductions Against Itemizing
The new Tax Credit and Jobs Act raised the standard deduction for families. A standard deduction is a set dollar amount that those who do not itemize deductions may subtract from their gross income. In short, it’s how taxes may be “cut” by the government. While you may have saved gas receipts, logged training expenses and collected childcare check stubs, these itemizations may still come in less than the standard deduction. You can choose to do the math yourself, or you can opt for an experienced tax preparation specialist to help walk you through what expenses are eligible for deduction and which aren’t, arriving at the best choice for your finances.
Organize All Documents and Receipts
Whether you’re choosing to prepare your taxes yourself, use online preparation software, or employ the aid of a local tax consultant, it’s important to have your documents and receipts organized. This includes anything from your:
- Self-employment or small business invoices,
- Receipts for itemized deductions,
- W2 and 1099 forms (and other forms from the IRS),
- Documentation for 401k contributions,
- Social Security income, or retirement account contributions and withdrawals.
If you’ve purchased a home or had a change in your family status, such as divorce, death, or marriage, be sure to have supporting documents for that, too. Mortgage interest is tax deductible, so you’ll need your lender statements. Any charitable donations, whether goods or straight cash donations, will need documentation and receipts also. While not all may be necessary, it’s important to have a back-up for all financial transactions and relationships.
Save For Tomorrow
Another way to reduce your tax bill is to reduce your adjusted gross income. Contributions to your 401(k) and other select retirement accounts are not taxed, so anything you contribute is subtracted from the income you earned that year. You have until April 15 to open either a traditional 401(k) (with contributions tax deductible) or a Roth IRA (contributions aren’t tax deductible, but withdrawals later are).
A professional tax advisor can help you determine how much to contribute to your retirement accounts to help ease your tax burden now, as well as into retirement. Some withdrawals from IRAs and other investments may be subject to tax, meaning that your estimated retirement income may not be as high as you anticipate. By strategically contributing, you may be able to lessen your tax bill now and in the future.
Consult With Your Financial Advisor
Many people may find it easy to file a simple 1040 for taxes, but if you have unusual tax situations, are self-employed or run a small business, or have had significant life changes over the past calendar year, a certified tax preparation specialist may be able to help you properly itemize your deductions, allocate income to retirement in a tax-friendly way, or file an extension or payment plan with the IRS.
You have many options for preparing your taxes, from self-preparation to online software and national tax preparation companies. For those who have a tax situation that isn’t straightforward, or for those who wish to have guidance for future filing, a local, certified public accountant (CPA) or financial advisor may be the best choice. These individuals make it a year-round job to understand changes in tax laws, including those in your state and municipality, and can help you prepare during the year so April isn’t as stressful.
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