April 15, Tax Day, is coming up fast. So before you grab that cup of coffee and a green eyeshade to get ready to do some serious number crunching, here are a few tips that might help.
Get Organized
Whether you are a do-it-yourself tax preparer or use a tax professional, you will need to get some documents together before you sit down to fill out the forms. Organizing documents by category will make it easier to input information and reduce the time (and fees) you will pay a preparer. Here is a quick checklist. More comprehensive lists are available from tax service providers or finance websites.
Personal data: social security numbers and dates of birth for you, your spouse, and dependents.
Income: W-2s for wages; 1099s for retirement, dividend, and interest income; and K-1s for partnership interests. Financial institutions are required to send you this information, and you should have most of them by now. If you have misplaced them, your year-end statements might show year-to-date information you can use instead.
Adjustments to Income: Qualified IRA and retirement plan contributions, tax credits (like earned income, energy, and child credits).
Deductions: Mortgage, home equity, and investment interest paid; real estate, state, and local income taxes; charitable contributions, and medical and dental expenses (if overly large compared to your income).
Get Help
If you are doing your own taxes, there are tax software providers that will guide you through the process, helpfully prompting you for information, and doing the math as you go along. Some providers allow for downloads of your information directly from financial institutions, which may prevent input errors.
If you have a simple return, you may be able to use the software for free online. E-filing is encouraged by the IRS and many states and may be worth the cost if you are expecting a refund, as you can get it in days instead of weeks or months. Check for discounts or coupons for software and e-filing costs that may be provided by your bank or broker. Low-income taxpayers may also get to file for free at the IRS and state websites. If you do not have a computer at home or access to one at work, your local library will allow you access to one, for free.
If you need to use a tax preparer, check them out as carefully as you would any other professional who will have access to your personal information. A word of caution: getting cash advances on tax refunds (refund anticipation loans) rarely makes sense, particularly when e-filing. The fees or interest charged on these loans can be high, so unless you need the cash immediately, you are better off e-filing early instead. A useful local resource is The Accounting Aid Society (http://accountingaidsociety.org/), which offers free tax preparation for low- to middle-income individuals at sites across Wayne, Oakland, and Macomb counties.
Get Going
Avoid the stress of filing at the last minute. If you are lucky enough to be getting a refund, filing early will get the cash to you much sooner than if your return is bogged down with everyone else’s. Even if you owe, get it done early, as you can always file it later. This will avoid errors and gives you more time to research or remember deductions you may have missed the first time around.
Get It Right
If you still find yourself scrambling to make the deadline, don’t panic. Rather than file a sloppy return that might raise audit flags or leave out some deductions, file an extension by April 15 instead. It will give you six months to get it right. The bad news is that you still have to pay what you expect you owe, or face penalties and interest charges later. A word of advice: If you are a procrastinator, keep working on your return even after you file for the extension. It won’t get any easier six months later.
Believe it or not, these quotations come from an IRS webpage: “Few of us ever test our powers of deduction, except when filling out an income tax form.” (Laurence J. Peter) “Income tax has made more liars out of the American people than golf.” (Will Rogers) “Taxation with representation ain’t so hot either.” (Gerald Barzan)
Ina Fernandez, CPA has over 25 years of investment experience, and is currently Managing Director at Birmingham, Michigan-based Liberty Capital Management, Inc.