Unfortunately, there are only three certainties in life: we are born, we die, and we pay our taxes. Sending our yearly contribution to Uncle Sam is unavoidable, but there are ways to make this time less stressful. If you have been procrastinating, or if you are behind in gathering all the paperwork and data necessary to file your taxes, STOP! Waiting until the very last week to start getting your taxes ready is the biggest mistake you can make.
To help you on your way, here are ten tax tips that will help you with organization, accuracy, and avoiding an audit.
1. Don’t wait until this last minute! Not only will you be in a frenzy, searching through boxes and closets and filing cabinets for your information, but you will also be inviting an audit. Research shows that the people most likely to get audited are those who file first, and those who file last. Waiting until the last second, or sending it in one or two days late, is a red flag for the IRS. You will also be more likely to make errors on your taxes if they are done in a last-minute hurry.
2. Make an informed decision about who will prepare your taxes. It might be more expensive to hire a CPA to do your taxes, but it could save you thousands of dollars in any mistake you might make. If you have less-complicated taxes (i.e. no dependants, deductions or self-employment) then you might be able to handle it yourself. But if you own your own business, work as an independent contractor, or need to claim major deductions, a CPA can be of an enormous help. They will catch things that you might not even know to look for and are more informed about what qualifies as a legitimate deduction.
3. Double-check your forms. There is no red flag more prominant than a tax return completed on the incorrect form. If you have chosen the wrong form, transfer all data to the correct one or risk an audit. You can find detailed information about forms on IRS.gov, or you can talk with your CPA.
4. Know the details about home office deductions. It is true that if you work from home (full-time or part-time) that you can deduct rent, utilities, materials and electronics from your taxes, but you should be aware of how that will affect future years of taxes. In some states, you will be required to pay taxes on your home when you sell it if you’ve previously claimed a home office deduction. Talk with a CPA to weigh the pros and cons of this tax decision, and make sure that you have receipts for all of these things. Also, you cannot deduct your entire mortgage payment or rent from your taxes; only the percentage that applies to the square footage of your office space.
5. Know specific tax considerations for your industry. In different states and in different industries, there are varying opportunities and rules for tax deductions. For example, if you work in the entertainment industry, you might have different rules than if you were an attorney. Check with your CPA about these different rules, and make sure that you have considered every option available.
6. Obtain a software program. If you are doing your own taxes, computerizing your information will be highly beneficial. Software packages such as QuickBooks and TurboTax are excellent for this purpose, though you will have to buy the new edition for each coming tax year. You can also use a simple spreadsheet, such as Microsoft Excel, to keep everything in order.
7. Consider your retirement. There are numerous ways in which you can use taxes to secure your future retirement. If you are self employed, or if you don’t have a pension plan, this can be great insurance for your future and that of your family. Consider putting a percentage of your taxes toward retirement each year.
8. Save everything! Just because you’ve filed your taxes does not mean that you can have a bonfire party will all of your friends and associates. Keep all of your tax documentation for at least one year after they have been submitted in case you are audited or are asked questions about deductions or income. Have a specific file for past taxes in your file cabinet so that everything is together and it can be accessed for future use.
9. Make Copies! Spend the ten cents and get copies of all paperwork you submit to the IRS. In the case of a computer foul-up, or if you need to resubmit anything, you will have it immediately.
10. Use eFile. Since its inception, e-file has been growing in popularity, and it guarantees a speedy return. Unless you have loads of paperwork, or the IRS won’t accept if for your particular form, submit your taxes electronically. You can do this yourself or through your tax preparer. Returns arrive 75% faster than when you file through the mail, and you don’t have to worry about problems with the postal service. The IRS prefers that you submit in this fashion, which means you are less likely to get audited. Since more people submit electronically, yours will get lost in the shuffle, and will not be an obvious red flag for auditing.
AND…one to grow on:
Plan for next year! Since you’ve just finished your 2005 taxes, start preparing for 2006. You don’t want to end next year in a frenzy of tax-preparing fear. Instead, set up file folders or a drawer in which you will save all receipts, mileage logs and other documents so that you will be well prepared for the upcoming tax season.