By David Horwedel, EA
Tax season can be a stressful time for many Americans, but it doesn’t have to be. Here are some tips to simplify the process and minimize any tax liability or maximize your refund.
“I have to get my documents together!” Does this statement sound familiar? I’ve heard it thousands of times from my clients at Torchlight Tax. Often the need to get them together is because you placed them apart!
1. Have a Stable Storage Space for Your Tax Documents
Having a stable, safe space to store your tax records and perform your tax paperwork simplify the tax filing process. There are two ways in which this can be done:
- Storing Your Hard Copy:
The old school method of placing tax documents in one location will allow you to easily access your documents, saving you from a lot of hassle when you need them. It is also advisable to work on taxes in the same space next to your records. If your returns are simple, getting organized could mean a file or banker’s box that you put in a closet and bring to your kitchen table.
Toss out your junk mail but not IRS and state letters and tax forms such as 1098s, 1099s, and W-2s.
When you receive and open your mail, place your mail in the same box. You will never lose your hard copy documents again!
- Saving Your Soft Copy:
Make it a priority that you have a solid backup plan when storing information on electronic devices or online. Keep your passwords safe and invest in antiviral protection on your devices to avoid hackers.
Make it your duty to become tech-savvy. This will allow you to perform tasks such as scanning hard-copy documents, to save them onto your computer, laptop or any other device that is able to store digital documents. You can use an external hard drive, a USB device or store your information in the Cloud.
Finally, download soft-copy documents that you receive online through email or other apps. If you do this, then your computer and workstation will become your “stable location”. If your computer crashes, breaks or gets stolen, you will still be able to access your documents, due to your backup processes.
However you secure your documents, follow the system and always put the documents in the same place.
2. Keep Separate Accounts for Business and Personal
If you have a business, make sure that your personal and business accounts are separate.
If you have multiple businesses, keep a separate bank account for each business.
Deposit all business income into the business bank account and pay all business expenses out of the business bank account.
Pay all personal bills from your personal bank account. Transfer funds from business to personal or vice versa before paying a bill.
Keeping your business and personal accounts separate will save enormous time and effort. Ideally, you should have a business account and business credit card, and a personal account and personal credit card. Properly used, these can replace shoe boxes full of receipts.
By not comingling business and personal funds, you simplify your bookkeeping and tax-filing enormously.
Remember if you pay an expense by credit card and take the whole expense as a deduction, you cannot take paying off the credit card as another business expense!
Your bank account showing payment is usually adequate to show you paid an expense. For charitable donations over $250, you do need a letter of acknowledgement from the charity as well.
3. Understand your Tax Return
At Torchlight Tax, we answer questions when we review each tax return with our clients. This helps our clients understand what is on the tax return, which makes the process become very easy for the next year. Clients become alert about what to look out for when it comes to taxes.
4. Keep Track of Your Deductions and Tax Credits
If you buy solar cells or a new electric vehicle, these purchase documents go in your tax docs file for the year.
You may also be eligible for educational credits or the child tax credit or even the earned income credit.
Employers who had W2 employees in 2020 and 2021 should check out the Employee Retention Credit. Watch my video on or on the Torchlight Tax website or YouTube channel to avoid setting yourself up for a losing IRS audit on the ERC!
Keep track of medical, charitable and other expenses throughout the year.
5. File Early
Filing your taxes early can help you avoid stress and ensure that you receive your refund as soon as possible. When you file your taxes early, you also have more time to prepare in case you owe money to the IRS. In addition, the earlier you file, the more time you have to make adjustments to your tax return before the deadline.
6. Get an Extension if needed
It may be counterintuitive, but the IRS penalizes failure to file much more than failure to pay. At Torchlight Tax, as we approach a deadline, we get with our clients to file an extension for them. It does not cost anything and does not raise a red flag. Also, if you miss filing an extension before the deadline, you cannot file one after the tax deadline.
7. Contribute to Your Retirement Account
Contributing to your retirement account is one way to save for the future and lower your tax bill. By making contributions to your 401(k) or IRA, you can reduce your taxable income lower your taxes. Moreover, the money you contribute to your retirement account grows tax-free until you withdraw it in retirement. If you are self-employed, you can also contribute to a self-employed retirement plan.
You can also contribute to a Roth IRA. In this case, you do not get a tax deduction now, but you are not taxed on withdrawal. If inflation is high or you figure out a way to keep bringing in income during retirement, this may be a better option.
The advantage of the “traditional IRA” is your income goes down when you retire, and you pay a lower tax rate. This situation may not be ideal in the case when inflation raises your income, tax rates go up, or you work after retirement age.
The Roth IRA gives you no tax deduction up front. It accumulates tax free with no tax on distribution. Suppose you put in $5000 in after-tax dollars, and it accumulates to $30,000 when you retire in 20 years. The tax you saved on the $5,000 would result in you paying tax on the $30,000 later.
To Wrap Things Up…
Hiring an Enrolled Agent or CPA is prudent if you are not up to date on tax. A mistake on even a simple return can cost way more than the fee you pay a tax professional.
If you want to take the time and trouble to understand tax and file your own returns, that is great. Just be sure to review each year for tax changes, and DON’T GUESS WHERE TO PUT A NUMBER. You will have to learn some tax nomenclature to do the job right.
An EA or CPA can help you navigate the complexities of the tax code and ensure that you receive all the deductions and credits you are entitled to. We can also help you identify potential tax savings opportunities and avoid costly mistakes that could result in an audit. If you are unsure about the tax implications of a significant financial event, such as starting a business or selling a rental property, consult with a tax professional.
By implementing these actions, you can simplify the tax preparation process and potentially pay less tax or get a higher refund.
Tax preparation can be intimidating, but by taking advantage of these top tax tips, you can simplify the process and lower the stress.