You’re a smart, capable (successful even) grown-up. And yet tax time reduces you to a procrastinating, nail biting, crazy person.
Why? Because taxes are overwhelming. Taxes feel soul crushing largely because the variables are endless, the rules aren’t clear to everyday people, and the record keeping can be onerous.
Let’s say for instance you’re part of a household with two wage earners. This is where life and taxes can get complicated. This year you may have investment earnings (like interest or dividends) and because you sold some stock, capital gains. And because you’re both working, you also have a nanny, which requires you to pay the dreaded Nanny Tax. Maybe you or your spouse is self-employed or has variable income.
Compounding the confusion (and unbeknownst to you), you're failing to keep some records. To paraphrase Plato’s Socrates, “You don’t know, what you don’t know.”
Not knowing if you’re in compliance leads to frustration. And if you’re married, frustration is contagious, and even generational. A client told me once that he carried double stress when it came time to file taxes with his wife because he grew up in a house where finances were a sore subject with a lot of yelling. He learned early on that when the tax forms came out, you stayed out of that room. You might find that you take out your tax stress on your partner who is just as overwhelmed as you are (or vice versa).
The thing is, it doesn’t have to be this way. There are simple ways to take control of tax prep. In fact, there are a number of organizational steps you can take this month that will dispel that feeling of impending doom that blows in New Year’s Day and hovers until April 16. Here are eight of them.
8 things you can do after Jan 1 to lighten your (emotional) tax burden
1. Prepare a manilla envelope labeled: Taxes 2017.
Congratulations! You’ve already started your tax prep for next year. You’re amazing. This will be your drop zone for charitable donation receipts, out of pocket medical expenses, property tax bills, and anything you may need to save for the following year. Because you have a no brainer destination for these things when they cross your desk this year you’ll be more likely to handle them and potentially save you money and aggravation next year when you actually file the tax return.
2. Prepare a manilla envelope labeled: Taxes 2016
Since you’ve just created next year’s envelope you’re already an expert. This 2016 “tax envelope” is your home for the important documents that will come trickling in over the next couple months.
Here are some to look out for:
W-2s. The law requires business to send W2s by Feb 2. If you don’t receive yours around that time then you should be reaching out to your employer. If you never receive yours and don’t have one when you file your return, that’s kind of on you.
Takeaway: If you don’t receive it in early February, call your employer.
- 1099s for Brokerage Accounts - If you have an after tax brokerage account, you have to pick up all of the earnings generated by your investments. This includes interest, dividends, and capital gains. It’s never fun to pay taxes earlier than you have to, so it will be important to understand how much taxable income your portfolio is spitting out each year. Your portfolio is tax efficient, right? No? Topic for another day.
- Mortgage interest statement (Form 1098) - The interest you pay on your mortgage is treated as an itemized deduction on your tax return so you definitely don’t want to miss this deduction. The 1098 will come by mail and will list out how much interest you paid to the bank in the prior year.
- Charitable donation receipts - Each time you make a donation to your favorite charity, you should be saving any documentation from the charity that verifies you made the gift. A letter from the charity will satisfy even the pickiest of IRS auditors should they ever ask for more “detail”. Be aware that most charities provide these confirmation letters soon after you make a donation...so be sure to stuff them in your manilla envelope when you receive throughout the year.
3. Download this organizer.
This simple spreadsheet will trigger you to gather important information your accountant will need to help you get your maximum deductions (and credits that you are due!). For instance, did you know that the government gives you up to $2,500 of cash if you have a child in college? You’ll want to make sure you give your accountant all the necessary info so he or she can get you the most money back from the IRS.
4. Gather docs based on last year.
Unless there have been substantial changes in your work or home life in the prior year, the documents you’ll need should be similar. Pull all the same statements you included in last year’s return. For instance, if you included a statement from Bank of America in your return last year you know to look for an interest statement from that account (and stick it in your manilla envelope). In theory you should receive all your docs by the beginning of March. Target the first two weeks of March to get them squared away.
5. Decide how to file your return.
You’ve got two realistic options: prepare your return yourself with TurboTax, or hire an accountant, which costs more initially, but could save you money if he or she finds deductions you didn’t know to claim. Here’s a tip on hiring a profession: If your documents are really organized it will take less time for the preparer, which may enable you to negotiate a lower tax prep fee. Accountants usually charge a preparation fee based on the time they spend to prepare or its complexity. The easier you make it for them, the less they should charge you.
Ned knows, getting an early start on taxes is the way to go.
6. Hire your tax professional in January. Don't wait.
Acting in January gives you time to vet the professional. You need someone you can trust with your sensitive information. That’s a decision you don’t want to be forced into because April is closing in on you and all the accountants are booked. Before you hire, get an estimate. Ask the preparer if there is anything you can do on your end to help lower the prep fee. It could save you a couple hundred bucks.
7. Set up an initial call.
A 15 min phone call may be all you need to find out the preparer’s process. Ask, How do you collect information from clients? Do you have a checklist I can follow? What are the dates you need to receive my information? Again this is your chance to negotiate a better rate.
8. Consider having last year’s return reviewed.
The scariest part of errors on past returns is you don’t know to look for them. Years ago I had a prospective client who brought in his prior year return for review. As I went over the numbers I saw that his tax preparer had mistakenly added an extra $100,000 to his income. That’s an extra share of taxes on $100,000! His jaw dropped and his wife started hitting him with her hat. Not a good scene. Thankfully we were able to file an amended return for him to get the refund due them, but the moral is, you can’t afford to do your taxes on your own. Most accountants will offer a free prior year review to prospective clients. (You can sign up for one here.) When you’re shopping for an accountant be sure to ask for this. You can’t afford not to.
Taxes don't have to be terrible. Doing a little prep work in January can reduce your stress, and potentially save you money. Plus, getting organized this year puts you in a better position for next year. Come January 2017 you won’t need these tips anymore.
Get a jump start on your taxes. Download our free questionnaire for a less stressful and more efficient tax filing.
Featured Image Credit: Zeeyolq Photography