Income tax season has long been associated with among the most stressful times of the year. If you are experiencing stress and attribute some or all of the stress to tax time, the first step is to follow the guiding rule of “Know Thyself” and the second step is to understand the solutions.
Why the Stress?
Taxpayers have different reasons for being stressed during tax time. The stress may result from the complexity of their financial situation, the amount of tax owed, the ever-changing tax code, a potential audit, changing tax forms and instructions, or some other viable reason. You may think that your tax-time stress is due to several interrelated reasons. On the other hand, procrastination may be causing the stress; you simply may be too busy to make the effort necessary to gather your tax documents, expense information, and other tax-related items. No matter the root of your stress, many of the underlying reasons may be avoided with proper planning and preparation.
Planning and Preparation
The key to reducing tax-time stress most likely lies in planning and preparation. Potentially, you may lower your tax burden and reduce your stress with a professional tax preparer. In conjunction with a financial team, the preparer should be able to guide those who have complex situations and take advantage of tax law changes. Whether you use a professional preparer or a tax software program, stress may be reduced by keeping good records throughout the year.
Start a Tax File
Create a place in your home where you store tax-related documents. For 2015 income taxes, begin your tax preparation just after you file your 2014 returns. Gather and file information from the first of the year, including receipts for expenses that are potentially tax deductible, such as charitable donations, medical and dental expenses, tuition, daycare and unreimbursed work-related expenses. If you are tech-savvy, try an electronic receipt and tax organizer such as NEAT Receipts Software. There also are apps for that, one of which is called “Shoeboxed” that helps to track tax deductible items throughout the year.
Paying taxes is not a once a year proposition; in order to beat tax-time stress, consider making tax planning a year-round activity.
Be One of the 7% – File an Extension
If you simply will not be prepared to file your taxes on April 15, you can file Form 4868 for an automatic six-month extension. Be cautious. This extension to file taxes is not an extension to pay. In other words, you are required to pay at least 90% of your income tax due. If you do not pay the proper amount of tax paid in, you risk being assessed interest and penalties. The IRS reports that about 7 percent of taxpayers seek a six-month extension to file.
Tax Tip: Fund a SEP-IRA
Tax Deductible Retirement Plan Contribution: If you earn self-employment income (e.g., board director, freelancer, sole-proprietor) consider funding a SEP-IRA (Simplified Employee Pension) by the tax-filing deadline plus extensions. You may have up until October 15 to open and fund your SEP-IRA with 25% of W-2 earnings or 20% of net self-employment earnings. Also, with proper planning, there may be other retirement plans that allow you to contribute a larger dollar amount and receive a larger tax savings. Keep in mind, the types of retirement plans and contributions to the plans should be viewed in the context of your overall plan.
