The Tax Man Cometh: Are You Ready?

Spring is coming and along with the warmer weather there are many traditions that go with this time of the year. You might be getting ready to do some spring cleaning or maybe you are getting ready to work on your yard and flower bed.

Something else that comes with Spring of course is Tax Season. Now if you are like me, this is not one of your favorite times of the year and probably you would not rather deal with this issue.

However, it is inevitable so we might as well be prepared. Here are some tips that I trust will make the process a little more endurable.

I. Get Organized

You will need to gather all your paper work for preparing your taxes.  Most of the documents needed fall into these categories:

  • Income: W2 Statements, Dividend Statements (i.e., 1099 forms, etc.)
  • Deductions: Mortgage Interest Statements, Charitable Contributions, etc.
  • Miscellaneous: Medical expenses receipts, business expenses, etc.

II. Plan Your Time

This year the deadline for filing your taxes is April 18. Ensure you set time aside to prepare your taxes. Usually what I do is spend one Saturday in March devoted to this process. That gives me plenty of time to do the work and to resolve any questions that might come up.

If you feel fairly confident of the process there is excellent software available that can guide you through every step. Alternatively, you can also seek the help of a tax professional. Finally take advantage of electronic filing and avoid last minute, long lines at the Post Office.

III. Prepare for Next Year

With the process completed, start preparing for next year. Ideally you should be at the point of breaking even in terms getting a refund or having to pay the IRS.

If you are receiving a large refund, don’t mistake it for a large bonus from the government. All this means is that they are deducting too much money out of your pay check every time and that you are providing the government with an interest free loan.

Work with your Human Resources department and update your withholding information (using the W4 form). That extra cash flow can help you achieve some other financial goals like finishing your starter emergency fund, accelerating your debt snowball, starting on your fully funded emergency fund, or investing more.

If you had to pay a large amount, here are a couple of options to improve your position:

  • Increase your charitable donations to qualified non-profit organizations.
  • Increase your retirement contributions to qualified plans, IRAs, etc.

6 For because of this you also pay taxes, for the authorities are ministers of God, attending to this very thing.
7  Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed.

Romans 13:6-7 (ESV)