During my appearance on the CBS show, The Talk, I gave 5 tips to a stress free tax filing this year.
Tax season is here and if you’re dreading filing your income taxes or dealing with the IRS, you’re not alone. The IRS audited 1.6 million taxpayers in 2011 and the thought of an audit – among other worries – can fill even the calmest person with fear and anxiety. But there’s no need to stress out about handling your income taxes and staying on Uncle Sam’s good side. Here are five steps for a stress-free tax time:
1. Gather your documents
Before you prepare your taxes, gather all the documents you need to prepare a complete tax return. This includes income documents, such as W-2’s, 1099 forms, your Social Security statement for older Americans, and dividend and interest statements from your bank or broker. You’ll also want to locate other tax related documents, including proof of any property you bought or sold, a summary of moving expense, childcare expenses and educational expenses. And finally, you’ll want to collect tax deduction documents, such as mortgage interest statements, records of property taxes paid, charitable donations, retirement contributions, and healthcare or job-related expenses.
2. Make retirement contributions
You can reduce your taxable income by contributing money to a traditional individual retirement account (IRA). Since the tax filing deadline is actually April 17th this year, you can make an IRA contribution up until that date and it can count toward a 2011 tax year contribution, lowering the taxes you pay for last year. If you were under age 50, as of Dec. 31st 2011, you can sock away $5,000 into an IRA. If you were 50 or older, you can stash $6,000 into an IRA. Older savers get to put in an extra $1,000 to let them play “catch up” on their retirement savings.
3. File Your Taxes Online
Whether you’re working with a tax professional, or doing your own taxes with the help of online software, save yourself a lot of hassle by e-filing. Not only does this help to prevent mistakes (built in calculators do “autochecks” for you), but it is also easier and means no waiting at the post-office. You upload and it’s done. Plus, when you e-file, you can opt to get your refund via direct deposit, which means that money goes directly into your checking account.
4. Get an Extension
Good news! Tax Day is April 17th this year. (We all get two extra days because April 15 is a Sunday, and April 16 is the Emancipation Day holiday in Washington, D.C.) But if you’re worried about not being able to file your taxes on time, it’s actually not that big a deal. By law, if you’re unable to meet the April tax-filing deadline, simply request a tax filing extension. It’s easy enough to do by filling out the appropriate form (Form 4868) on the IRS’s website. Once it’s accepted, you automatically get a six-month extension of time to file. But remember, if you’re going to OWE taxes, you’re still expected to pay by April 17th or you could face a late payment penalty.
5. Explore a payment plan
If you’re worried that you owe more taxes than you can afford to pay right now, don’t let that stop you from filing your taxes as required by law. You have three options when money is tight and you can’t pay your taxes immediately. You can: a) contact the IRS and seek extra time to pay – as much as 120 days; b) contact the IRS and set up either an online payment agreement or an installment agreement; an installment agreement can last as long as 72 months; or c) pay your taxes with a credit card.
6. Adjust Your Withholdings
If you’re receiving a big refund check every year, that means you’ve kind of goofed financially. The average refund is over $3,000. That means the government was taking out an extra $250 month from your paycheck! You’re essentially giving the government an interest-free loan! If you’d rather have that money in your pocket each month, you can walk into your HR office and redo your W-4. You want to increase the number of allowances claimed. To accurately determine how many allowances to claim – because you don’t want the IRS taking out too LITTLE money – use the withholding calculator on the IRS’s website. In your very next paycheck you’ll see an increase in your net pay, and you can start putting that money to work for you.
7. Spend Your Refund Wisely
If you do get a refund, it may be tempting to blow it, but I recommend using about 10% for a fun purchase or splurge. With the other 90%, I suggest the following: Invest in yourself (Enroll in a class or professional development program you’ve been meaning to take) and pay down debt, such as a high interest credit card, or put it towards your mortgage.