It’s almost August, it’s sunny outside, and the last thing you want to think about is your tax bill. In fact, you have last year’s tax filing memory so deep that the phrases “April 15th” and “1040 form” don’t ring a bell at all.
I don’t blame you. It’s nice to forget all about taxes during the last half of the year. But there are some things you could do today to make filing your taxes that much easier for 2010. Here are some tips to help your tax filing process run like a well-oiled machine come next spring.
A lot can change in just a short amount of time. Maybe you got married earlier this summer, are having a baby later this year, or perhaps you bought a house. Or, if your personal life isn’t changing, maybe your professional life took a 180. Did you change jobs, take on some freelance work, or move for your current job? All of these situations can affect your tax bill.
If you are expecting a new tax deduction member in your family, it will most likely lower your tax bill. One extra person in the family will equal one new personal exemption. Additionally, your new little bundle of joy may qualify you for the child tax credit and the child/dependent care credit.
If you bought a house and you weren’t itemizing your deductions before, you definitely will be able to now. You’ll be able to deduct home mortgage interest and property taxes on your new home. Plus, now that you’re in the itemizers club, you can also deduct things like state and local taxes, investment interest, charitable contributions, and other miscellaneous expenses. No wonder everyone wants to join the itemizers club!
What if you moved to a new city for a new job? You can deduct your moving expenses. What happens if you take on that extra freelance work? Of course, you’ll have to pay taxes on those earnings.
Change Your Withholdings
You know that W-4 form you have to fill out every time you start a job? That form tells your employer how much to withhold from each paycheck to pay federal income taxes. Most of us use the simple formula on the form to enter a 0, 1, or 2 and we’re done.
But withholdings are a tricky subject. If you withhold too much, you’ll get an outrageous tax refund and be kicking yourself for giving Uncle Sam that interest free loan. Likewise, if you move them too far in the opposite direction, you’ll receive a big tax bill next year that you weren’t expecting.
If you’re a pro at calculating your withholdings, try playing with different amounts until you find the perfect balance. If you know you’ll be able to deduct a huge amount for your new home mortgage interest, change your withholdings to deduct less from your paycheck. On the other hand, if you got a new job that came with a huge raise, you’ll probably need to bump up your withholdings to balance out your higher salary.
Want some help? Check out the IRS tax withholding calculator. It’s easy to use and does a good job in most situations. One note of caution: If you have business income, it won’t factor in self-employment taxes or any estimated taxes you pay.
If you don’t feel comfortable changing your withholdings, that’s okay. Knowledge is power and just knowing that you’ll have some changes to next year’s tax return is better than being caught off guard. If you’re really uncomfortable with making any changes, you might speak to your Human Resources office, tell them your situation, and they could help you make changes to your form.
Documentation Is Your Friend
One of the main reasons that tax season is so stressful is because taxpayers are unorganized and did not keep a good documentation system. Now—not next spring—is the best time to get your papers in order.
Did you buy a new computer for your freelance website business? File that receipt away somewhere safe. You’ll need it when you try to deduct the expense from your self-employment income. Is your new baby going to daycare? Keep an organized record of how much you’re spending on childcare. The IRS will want to know about it if you try to deduct those expenses.
It’s hard to think about tax planning when all you want to do is have fun in the sun, but taking a short moment to plan today could make life that much easier next spring. If anything, assess the changes that have happened in your life since your last tax return so you’re prepared for how they’ll affect your next one. After you’ve done that, get out there and enjoy the rest of the summer!