Preparing for NEXT years taxes!

In honor of tax day, here is a great article to 

get you prepared for next year. 

It's never to early to start.

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1) Pretend You’re a Fortune 500 Company

Large publicly traded companies are required by the SEC to file financial reports on a quarterly basis (form 10-Q) to keep the stakeholders (which consist of the shareholders, the public, the government, and others) informed about their performance. Similarly, you should divide your year into quarters, or if it’s easier to keep track of, seasons:

• Summer – In the summer, you should start organizing your records. As of a few months ago, you actually filed your taxes. And what a relief that was. However, taxes never stop. You should make sure your filing system is intact and ready to go with the new year’s tax records, starting back in January. Make sure that the past 6 months look good and that you are ready to go for the rest of the year.
• Fall – Begin estimating your end of year annual income and taxable income. You should have a pretty good idea of your salary, hourly wages, commissions, bonuses, etc. This obviously won’t be exact, but you should have an approximate. This will let you know if you are behind or ahead on tax payments.
• Winter – The year is practically over (or is over depending on what part of winter it is!). Start preparing to file your taxes. Get all of your documents ready to go. Start gathering the different tax forms you will need. Separate receipts you will need from ones you won’t need.
• Spring – Actually file your taxes, now. If you have kept up to date over the past 3 seasons, you should be able to file relatively quickly! But, it’s not over. Continue on to “summer” and do it again!

2) Practice Good Record Keeping

Obviously the over-riding theme behind the last section was keeping good records, staying up to date with them, and just being on top of your game. On top of keeping good records, you want to practice good (and safe) record keeping by keeping some of your documents extra secure.
Think about it this way: If you lose a pay stub, you can get a new one printed out through your HR or payroll department. If you lose a receipt for a large ticket item, you can probably get the store to re-print it. If not, the consequences aren’t too severe.

What kinds of documents should you keep extra secure?

• Birth certificates for you and your family members
• Any wills that have been drafted or published for you (and your spouse)
• Stock and/or bond certificates for large holdings
• Deeds to any real estate holdings

Most of these documents can be reissued, but typically the value of them is pretty high so it is not worth the hassle. Keep them in a safe deposit box and be safe.

3) Adjust Your Withholding on Your W-4

As discussed in the linked article, you usually want to adjust your w-4 to maximize your earnings, which in tail minimizes your refund or payment. The closer you can get to $0 owed the better.
There are a few thought processes:

• A tax refund is an easy way to save. It is, in a way, a forced savings plan. You probably wouldn’t have the willpower to save the money otherwise, so getting it all in one lump sum may help you apply it towards debt or towards a goal.
• A tax refund means you threw money away. Had you received the money you would have put it in an investment vehicle that pays interest. You gave the government a tax-free loan.

My thoughts? It is easy to say “Well, mathematically it makes the most sense to have as close to no refund as possible!” But, if you truly lack self-discipline and benefit from getting a large refund, then go for it. If you wind up paying less in taxes each week to ensure you don’t get a refund, but spend all of the extra money, are you really ahead?
Also, unless you are getting a large amount of interest, the amount of money you are missing out on is probably pretty minimal. The average tax refund is about $2,500 and at 3% for the year, you would earn less than $100. In the end, do what’s right for you.

4) Keep Your Receipts

The linked article will give you a lot more depth. But the jist of the article is that you should keep all important tax records filed for up to 7 years (different times for different kinds of documents).
An overview of a few of the forms you need to keep on file:

• Paycheck stubs
• W-2 Forms/1099 Forms
• Receipts for any items you can deduct if you plan to itemize
• Insurance and medical records
• Charitable records

As I said, click the link for more information, but the important thing is you need these documents in case you get audited.

5) Pay Your Taxes Before You File

You are required to pay your taxes. If you don’t believe me, click on the above link and see the awesome picture of Wesley Snipes.
Sometimes people don’t realize that there are rules around how you can pay your taxes, though. You must pay them throughout the year. You cannot pay them in one lump sum at the end of the year. So, if you were to decide to keep the money all year long (thus giving yourself an interest free loan) you would get in trouble even if you pay your full tax bill at the end of the year. The IRS will charge you a penalty for not making estimated payments.
You are unlikely to have made enough money off of the interest free loan to cover the penalty, so this is a losing proposition.
As said earlier, adjust your withholdings accordingly and make sure you pay your tax rates all throughout the year.

Do It All Over Again

There you have it, 5 simple ways to make tax season a breeze every year. If you follow these steps you should find you are spending less time every Winter/Spring filing your taxes.
As I said earlier, it does take a little bit of time up front, but the time you save in the back end makes it worth it!
If you have any suggestions for any of the 5 steps, or an additional step you would like to add, please leave it in the comments!



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