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This Year Resolve to Make Your Taxes Less Taxing

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This Year Resolve to Make Your Taxes Less Taxing

 

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes”.  – Benjamin Franklin

 

Benjamin Franklin was one of the greatest “Renaissance” men of his generation, adept at everything from science to politics, he was also known for having a sharp tongue and penchant for humor in his writing. 

In a letter written to his friend physicist Jean-Baptiste Le Roy in 1789, he noted that “nothing is certain but death and taxes”. Centuries later, this astute observation remains true for taxpayers and their CPA Taxescounterparts.  

Before becoming overwhelmed this tax season, it’s important to take a step back, and know that there are more resources than ever to help make this process easier. While the sheer amount of information available can be overwhelming, at My Financial Coach we want to help you navigate some common pitfalls. 

We believe that having an easier tax-season comes through planning. At the very least, tax-time can be easier by taking the following three steps:

  1. Preparation
  2. Filing Your Tax Return
  3. How to Utilize a Tax-Refund Windfall

Preparation

As with most projects and goals, a little bit of organization upfront will pay off later in the year when it’s time to start preparing your taxes. While some may still rely on a shoebox of receipts and their photographic memory, it is recommended to keep detailed records of anything that may be related to your tax situation in an organized filing system. 

TaxesIf you run a business, for example, you may have more reason to keep track of receipts to track your expenses for write-off purposes. If you typically itemize and have a number of medical bills, charitable donations, or even housing costs such as your mortgage you may also want to keep these documents close together or even in the same folder. 

At the start of each year, you should also review the previous year’s taxes, as well as modify your W-4 Federal tax-withholding options as needed along with your state’s withholding options (if applicable). Tax time should not be a time for surprises, particularly costly ones should you have failed to pay your share of taxes on time.

Lastly, if you have changed employment during the year, or hold multiple jobs, it is important to make sure that all current and former employers have up to date information such as your address to ensure you always receive your tax forms in a timely fashion. Many employers will also have this information available online either through a 3rd party website or through your Human Resources department. In case you have lost contact with a former employer, or if you need additional information on how to find your W-2 information online, ThePaystubs.com has created a handy guide

Filing

One of the first decisions that every taxpayer must make is how they will prepare their taxes. The age of filing taxes by hand is all but obsolete and many taxpayers have become reliant on tax preparation software to prepare their taxes. 

Still, there are taxpayers that choose to work with an in-person professional. Ultimately, the first step in moving forward is to make that decision of whether you will choose to prepare your taxes by hand, via software, or with a professional’s help. 

There are three questions that a taxpayer should ask of themselves to get started in this process:

  1. How knowledgeable am I about preparing taxes?
  2. Do I have complex tax preparation needs?
  3. What other miscellaneous concerns might I have around my taxes such as the cost and whether a refund is expected/or money is owed?

Due to new tax reforms, starting in 2018 there were numerous changes made to the IRS tax forms. While the intent was to shorten the number of lines on the IRS Form 1040, for some, this resulted in the addition of several new schedules that needed to be attached to their forms. For 2019 tax-filing, these changes will continue to impact how one will file. So, if you plan to file by paper form, it is highly encouraged to acquaint yourself with these new changes. 

The IRS has issued a Post-Release Changes to Tax Forms, Instructions, and Publications list with some recent highlights. As always, it is highly recommended to go to the source of new changes and rules by reviewing the IRS 1040 Instructions

If you have a simple enough tax-return such as for those who take the Standard Deduction, no complex investments, and no other complexities such as owning a small business or interest in special investments such as foreign assets, LLCs, partnerships, etc., filing by paper may make sense. 

That said, the prevalence of free and low-cost tax-preparation software might be a preferred alternative as it can speed up your tax return, and most software will ask other probing questions during the process to ensure you do not miss crucial deductions. 

Today, there are many players in the tax-preparation software space along with numerous reviews by several publications providing great resources. So for the sake of sparing our audience any redundancy, I would point our readers to some great articles reviewing these products from CNET, NerdWallet, and The Balance

While one’s aptitude for tax preparation as well as concerns about cost are large contributors in how you choose to file, for those that fall into the complexities mentioned above, professional in-person help should be considered. Working with a tax professional will usually cost more than purchasing a software program, but hiring a professional such as a Certified Public Accountant (CPA) can bring a level of expertise that might uncover not only additional tax savings today but could provide lasting tax planning strategies for the future. 

In searching for a CPA, Intuit put together an insightful article “How to Find a Good CPA for Your Taxes”, which contains 7-tips or “criteria” to look for in choosing your CPA. 

Lastly, as you start the tax year, an often ignored aspect is choosing when to file. At first glance, it would stand to reason that for those anticipating a refund, filing as soon as possible would make the most sense. That said, there are a number of reasons to consider why you might file early, choose to file closer to the tax-deadline, or even request an extension. 

Below is a guide to help navigate these decisions:

When to File Taxes Extension for Filing Your Taxes Breakdown

 

The Check Is in the Mail, Now What?

Once the dust has settled, you may find yourself receiving a tax refund. For most, hopefully, this will be received electronically, rather than as a true check in-hand, but regardless one question remains: what should I do with the money? 

On the one hand, any refund you receive is less an unexpected windfall and more a return of wages. On the other hand tax refunds can be quite sizable, and can be seen as a bonus. This is an important distinction because (hopefully) we tend to be more guarded with our wages, and aside from spending our income on the necessities (and some well deserved discretionary expenses) we also try to set some aside for later via savings. 

Bonuses are frequently characterized as “fun money” and all too often are spent before even having been received. While it is important to reward ourselves, developing a habit of borrowing against a future windfall can have negative consequences (especially if such expenses are temporarily thrown onto a high-interest credit card). 

Another reason to practice caution in pre-spending your tax refund this year is that your tax refund may not be as big as anticipated. According to the IRS, last year when tax filers prepared their 2018 taxes (in 2019) they saw an average tax return of $2,640, which was a 16.7% drop from the prior year. This trend is expected to continue in 2020 as many tax filers did not adjust their withholding back at the end of 2017 in which there were major overhauls to the tax system. As a result, many individuals found their paychecks go up, however, this later meant that their anticipated refunds had shrunk. 

Regardless of whether your tax return will be larger or smaller this year, there is no one right answer for what to do with a tax refund.  However, for those who are looking for some inspiration, the folks at Money Crashers have come up with “10 Smart Ways to Spend Your Tax Refund Money Wisely”. At the end of the day, how you spend your tax refund is a very personal decision that might be used to help jumpstart long-term financial goals. 

No matter how you decide to spend your tax refund this year, just know that today, more than ever there are numerous resources available to help educate you on your taxes. I hope that this article has helped educate as well as has provided some next steps to make this tax season less taxing! 

Best,

Andrew J. Crosby, CFP®, ChFC®, RICP®

Lead Financial Coach

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