5 tips for a smooth tax season
For too many, the coming of spring causes some unseasonal anxiety due to America’s annual right of financial passage: tax time.
It doesn’t have to be that way. Here are five tips to help take some of the apprehension out of tax season:
- Start early
Don’t wait until the last minute to start gathering your information for the April 18th filing deadline. Start with last year’s return to make sure you don’t forget anything for this year. As you receive your tax documents (1099s, K-1s, W-2s, 1095s, etc.), put them in a common spot so they are easier to put together when you deliver them to your tax professional.
The more time either you or your accountant have to go over your return, the better chance of avoiding mistakes and ensuring you take advantage of the deductions and write-offs to which you’re entitled.
- Don’t overlook major life events
Did you get married? Divorced? Have a child? Move? Tapped into that 401k before the end of 2016? Especially with marriage or divorce, consider the impact on how much you are withholding for taxes.
For tax purposes, you become a single filer the year in which your divorce is final, while even if you are married on Dec. 31, you get to file jointly for the entire tax year. For a newly single, high-wage earner, you may need to adjust your withholding to avoid a big tax bill at the end of the year. The same applies if you have a second job or other sources of income – increasing the withholding from your main job will offset what you owe at year’s end. Consult your tax professional about adjusting your form W-4 in these cases.
If you had a visit from the stork, you’re eligible for a $1,000 child tax credit if you make under $110,000 annually (married filing jointly), $75,000 filing single. That credit decreases by $50 for every additional $1,000 you earn over $110,000 (married filing jointly), $75,000 (filing single), phasing out for those making $130,000 (married filing jointly), $95,000 (filing single) or more.
Turning 65 impacts how much you can deduct in health expenses. If you’re under 65, you can only deduct medical expenses in excess of 10 percent of your adjusted gross income (last line on the front page of your 1040), meaning if you make $100,000, you need more than $10,000 in qualified medical expenses just to get $1 of eligible itemized deduction. But that drops to 7.5 percent when you turn 65. If you’re paying for your own healthcare, don’t forget that the premiums count toward your annual health expenses if they are paid out of pocket (not a before-tax employer plan).
If you move, keep in mind that municipalities and school districts have different local tax rates, meaning you’ll have to adjust your withholding accordingly. When I lived in Carlisle, for example, my earned income tax rate was 1.6 percent, but that increased to 2 percent when I moved to suburban Harrisburg.
- Life events, Part 2: Impact on quarterly estimated payments
Especially if something happens to increase your income and you pay quarterly estimates, make sure you make the proper adjustments. Failing to increase estimated payments to account for income growth will not only give you a larger tax liability at the end of the year, but the IRS could assess interest charges for significant underpayments under certain circumstances.
- Make sure you account for all income
While this tip ties in with making sure you have all your documents gathered well in advance, quite often you will receive an unexpected surprise when that extra money you received from that side job (1099 received), investment income, an inheritance or other earnings leads to a significant increase in your tax bill.
Keep in mind if you earn more than $600 for any individual, company or organization, they are required to report that income to the federal government in addition to sending you a 1099. If you receive an official form such as a K-1, 1099-MISC, 1099-DIV, 1099-INT, W-2G, W-2, to name a few, the government will be matching these forms to your 1040 that you file. If you are underreporting the income from these forms on your 1040, this will generally trigger a notice from the IRS.
Under Act 84 of 2016, this is also the first year that Pennsylvania lottery winnings are taxable in Pennsylvania. If you’re a big player, keep those losing tickets – should you win a taxable prize, you get to deduct the money spent on all those unsuccessful tries so keep a diary and the ticket stubs as your proof.
- Double check your return
The most common mistakes often involve inaccurate identification numbers. Make sure all Social Security numbers are accurate and if your refund is directly deposited to your bank, double-check the account number. You’d be surprised at the number of headaches that are caused by these simple mistakes.
Especially if you have your own business, have a lot of investments or go through a life change that could complicate your return, it makes sense to meet with your tax professional. Having a professional prepare and review your taxes will help ensure against costly mistakes, missed deductions and, perhaps most importantly, take the stress out of tax time.
Shane R. Fisher is a supervisor at Boyer & Ritter LLC, where he provides audit, accounting and tax services for a variety of clients and industry groups. He can be reached at 717-761-7210 or email@example.com