1. Assess Your Latest Effort
Did you have all your records at your fingertips? Did you have to go hunting for W-2s, or ask employers for second copies? Were possible deductible expenses in a file (paper or digital) where you could easily find them and transport them to your tax preparer? Did you have to make two trips to the preparer’s office because you found more stuff after the first trip (they LOVE that – NOT!)? Was time wasted hunting for Social Security numbers of family members and other dependents? Did you have a large refund, or did you have to pay a large amount, which would indicate that withholding or estimated payments calculations were off? Make a list of the good, the bad and the “needs improvement” and take steps now.
2. Communicate with Your Tax Preparer Sooner Rather than Later
Ask him or her for advice or suggestions now, while they have time to consider your situation without the crushing pressure of clients waiting on returns. If you know of changes or unpredictable situations occurring this year, explain them now. Changes to consider discussing with the accountant could include new children, divorce, a death in the family, an income change or unpredictable income, retirement of one or more earners in the household, a household member taking Social Security or a pension, and inheritances. They will appreciate the questions now, but attitudes might understandably suffer when under deadline pressure.
3. Adjust Withholding or Estimated Payments
There are three reasons you might need to do this: (1) your refund was large, (2) your tax payment was large or (3) you have changes in your situation this year. While it is a common emotion to be gleeful about a refund check, the fact is you just gave the government an interest free loan on money you could have been using elsewhere. If you work for someone else and your pay is relatively consistent, the solution is simple – just adjust your withholding rate. For guidance, the IRS has a withholding tool on its website that you can access here. If someone in the household is self-employed and makes quarterly estimated payments, adjust those up or down as appropriate. If there are changes on the horizon that are unpredictable in scope, your tax preparer can suggest strategies to mitigate the effects. For example, let’s say you know income could increase this year but you don’t know by how much. Your accountant could help prepare a strategy to increase withholding or estimated quarterly payments that would at least avoid penalties. That way, if you have to pay more, at least you will be paying only for what you legitimately owe without penalties tacked on.
4. Get Your Health Insurance in Order to Avoid Penalties
The penalties for not carrying health insurance ramp-up seriously for 2016 under the Affordable Care Act. The penalty is $695 per adult and $347.50 per child 18 and under in the household, with a maximum of $2,085. There are some circumstances where the penalty is waived or reduced. For more on the penalties, consult the ACA website here.
Use some time now to establish a system for filing your records. It will pay off in more time saved, and much less stress, at tax time. Take a look at the documents you needed for tax preparation this year. Office supply stores and on-line vendors sell simple expandable files that will work for many households. The “For Dummies” brand has a simple checklist for tax preparation files here. It is common for tax preparers to have a checklist available for the asking. This can all be done digitally as well. The basic IRS requirement for digital receipts is that they be accurate and can be readily stored, preserved, retrieved and reproduced. In other words, digital receipts are acceptable as long as you can deliver a copy of them to the IRS when necessary. One important caveat: have an ironclad backup system in place.
6. Keep Up!
Using a great system to organize (Step 5) is great, as long as you keep up. Studies on efficiency always reveal that handling a piece of paper once is the best way to go. In other words, when you walk in the door with receipts, retrieve them and file them immediately. If you fail to do that, at least follow-up weekly to file them. The longer they sit in a pile, the more likely they’ll never get filed, or worse, they get lost.
7. Start Early | Make a Friend
There might be one thing worse than walking into your tax preparers office with a shoebox full scribbled notes, and that would be walking in a week or two before the deadline. The six steps listed above are suggested with one ultimate goal in mind – to have your tax documents prepared in a less-stressful environment, which in turn should produce an accurate tax return reflecting exactly what you owe, but not a penny more. These are people who are good with numbers and know the law, not magicians. They will be much more likely to have a helpful attitude if you can meet them halfway with good documentation.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Merit Financial Group, LLC, an SEC registered investment adviser. Merit Financial Group, LLC and Botsford Financial Group are separate entities from LPL Financial.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. LPL Financial, Botsford Financial Group and Merit Financial Group do not offer tax advice.