Albert Einstein is synonymous with genius. Yet, when talking with his friend and personal tax account, he once said, “The hardest thing in the world to understand is the income tax.” His story reveals two things: First, filing taxes can be difficult. Second, even geniuses consult financial planners.
Because filing taxes can be a complicated process, people are more likely to make small errors that can have costly consequences. But, there are steps you can take to simplify the process, avoid mistakes and save money.
- Get organized: Start with the basics: save, centralize and organize your important tax-related documents to avoid losing important information. This includes earning statements such as W-2 or 1099-MISC forms; additional income statements like investment earnings; and information on potential tax breaks such as deductible student loan interest documentation and charitable contributions.
- Collaborate: Two heads are better than one. Discussing these materials with your spouse can help you more accurately organize tax statements, such as deductions and credits. When both partners understand their tax forms, each individual can help prepare for future filings and check for errors.
- File strategically: How you file a tax return can impact how much you pay. Consider all of your options before completing a tax return, such as head of household, married and filing separately, and having your dependents file separately.
- Timing matters: Failing to pay larger expenses in the last quarter of the year, such as a mortgage payment or large medical expense, can significantly reduce your potential tax refunds. Instead, plan ahead to reduce the risk of late fees as well as missed refund opportunities.
- Maximize your IRA contributions: Unless your spouse is covered by an employer-provided retirement plan and your adjusted gross income exceeds IRS limits, maximizing your traditional IRA will reduce your taxable income through relevant deductions. If you use a nondeductible IRA, consider a Roth IRA, which has a higher income limit and the potential to avoid taxation after withdrawing earnings.
- Be careful: Many Americans wait until the last minute to file their taxes, which often results in basic mistakes, such as using wrong or missing Social Security numbers, incorrect bank numbers, misfiling a return and simple math mistakes. In the event that you make a small error when filing, wait to see if the IRS calls. For more significant errors, you should amend your tax return via a 1040X form as soon as possible. In addition, if you can’t make the April 15th deadline, file a 4868 form. This will grant you six additional months to file, but will also require you to pay added taxes owed for the year.
There are steps available to avoid mistakes while potentially saving you more money. We also recommend following Albert Einstein’s example and consult a pro. A CERTIFIED FINANCIAL PLANNER™ professional can help you better understand your options and prepare you for tax season.