While making my way through tax season, I see several items that can be done year round to make your life easier from a tax perspective. Here are just a few that can save you time and money.
Cost basisTechnology and regulatory reform have made keeping track of what was paid for investments easier, but not perfect yet. Any time you move investments from one financial institution to another, make sure you ask the institution that you’re leaving for the cost basis on the investments. It’s much more difficult to go back years later and ask about an account that was closed a long time ago. That’s especially true if the investments moved into your name from a divorce. Get the cost basis while the paperwork from the divorce is being processed.
Charity DonationsEach time you take a pile of used stuff to a charity for donation, make a list of the items and attach it to the receipt. Then total the thrift store value of those items on each receipt. The IRS wants pretty specific records for donations like these, not just an indication of how many bags or boxes of things you gave.
Refund ExpectationsIf you’re either getting a big refund or paying big every year, you’re not managing your taxes well. If you owe a lot each year, you’re probably paying interest and penalties which is a waste of your money. If you get a big refund each year, the IRS has your money and you need to wait until you file your return to get it back. The IRS won’t give it to you mid-year just because you ask, nor will they pay you interest when they send your refund. They shouldn’t have to since they’re not a bank. A good tax professional can help you estimate what your withholdings and quarterly estimated tax payments should be during the year. Then your refund or what you owe should be a manageable level.
Consistent preparationFind a good tax professional and stick with them. This is efficient on many fronts. If the preparer isn’t just entering data and doesn’t have too many clients, they will become familiar with your situation and be able to suggest some tax saving strategies as well as have a pretty good idea if you’ve missed reporting some income or claiming some deductions. Even the preparer’s software helps with that by keeping track of items from one year to the next.
You don’t need to have your life revolve around your annual tax return. But being just a little proactive can help your tax filing be more accurate and easier to prepare.