It’s That Time of Year Again! Planning for Tax Time

By Linda Orlando

Most people look forward to the promise of spring, with warmer weather, flowers blooming, vacation planning, and the joy of sitting outside on a warm spring day listening to the birds sing. But the sound of birds singing can quickly be eclipsed by the sound of blood pressure rising as April 15th looms closer and closer. Here are a few tips that can make your springtime headache more bearable:

1. Get organized. The IRS demands documentation of every little thing you claim on your tax return. One of the most important things you can do throughout the year is establish and maintain a good filing system for keeping track of paperwork. For example, depending on the type of information your return will contain, you should file away your W-2 statements, credit card bills, utility bills, telephone bills, mortgage statements, bank statements, investment statements, and any receipts for items you will claim as deductions. Also keep receipts for big-ticket items that you will amortize depreciation for on your tax return. Banks, mortgage companies, and investment brokers send out annual statements in December or January, so those should be filed as well.

2. Be sure you have all the forms you’ll need. The IRS sends most people a filing packet in January, but it never hurts to have backup forms in case you need to redo them because of a mistake. You may also need different forms if you tax status has changed since last year, since the forms the IRS sends out are based on your previous year’s return. If you wait until the last minute to go pick up forms at a local library, you may be out of luck if everyone else waited until the last minute also. Same thing applies to software tax-preparation programs; the rush on purchasing those increases the closer you get to April 15th. Buy yours early, and keep an eye out for the best deal in terms of special offers or freebies that might come with the purchase. If you wait until the absolute last minute, you can find most forms online, either at Bankrate’s Tax Forms Library (www.bankrate.com) or at the IRS website (www.irs.gov).

3. Decide on the best way to do your taxes, and the best way to file them. Gathering the appropriate documentation is critical no matter how you decide to do your taxes, but after you have all the paperwork together you can either complete all the forms yourself, use software to fill them in, or pay someone else to prepare them. If you have the time and are a do-it-yourselfer with good attention to detail, you can use pencil, paper, and calculator to figure your taxes and fill out all the forms before mailing them in. If your time is limited, you don’t trust your math skills, or you feel more at home on a computer than with a calculator, then tax-preparation software may be the ticket for you. The two most popular tax software packages are Intuit’s TurboTax and H. & R. Block’s Taxcut, both of which come in several different versions for different needs. There are plenty of online sites that discuss the pros and cons of both, so do your research before deciding which is the best for you. Don’t forget to be sure your computer has the proper operating system and enough memory to handle the software. If your taxes are complex, if your math or computer skills are less than average, or if you don’t have enough time, you can always pay an accountant or a tax-preparation service to do your taxes for you. But as with everything else, you must line up someone early—the longer you wait, the harder it will be to find an accountant willing to squeeze you in among other appointments that were made in advance of yours. After you install the program, you may think you’re ready to go, but be sure to read the introduction or watch any instructional videos provided before you plunge right into preparing your return.

4. Decide whether you want to file your taxes electronically or by mail. If you’re already using your computer and software to calculate your taxes, consider taking that computer one step further and filing your forms electronically. According to the IRS, e-filed returns are processed in about half the time of paper ones, and you have immediate confirmation that your return has been received. Plus, e-filing catches any math problems, and the tax software industry and the federal government have joint ventures in place that may allow you to e-file for free. This filing season’s free e-file program guidelines were announced in January.

5. Use direct deposit for refunds. Whether you file electronically or by mail, you should consider having your refund check deposited directly into your bank account rather than waiting for the postman to bring it. Most banks will allow a direct deposit, but check ahead of time to be sure. If you decide you want to use direct deposit, all you have to do is fill in your account information in the appropriate spot on your 1040 return, and you’ll have access to your refund sooner.

6. Choose the best way to pay your tax bill. If you owe money with your return, think carefully about the best way to pay it, and don’t fall into the traps many people fall into in their efforts to satisfy Uncle Sam. Even if you can’t afford to pay your taxes at the same time as you file your return, you should file on time, because if you don’t the IRS will charge you a penalty of 5% per month of your balance due. Although the IRS offers you several payment options, the worst one of all is to pay with a credit card. Although the two companies that handle tax payments for the IRS accept American Express, Discover, MasterCard or VISA, each company has its own fee schedule on top of the credit card interest charges. In many cases, the credit card interest charges will cost you more than the IRS penalties and interest for not paying on time, especially if you can’t pay the balance in full.

Never, ever pay your taxes with a cash advance against your paycheck or on your credit card. The FTC warns that the typical annual percentage rate of interest on payday loans is over 350%, which is a ridiculous amount of interest for anyone to pay. Fees for credit card cash advances vary, but there is usually always an upfront fee followed by an interest rate of 20-25%. You could end up paying more in interest than your tax liability in the first place.

The IRS offers installment payment plans, and you can pick your payment amount and the day it will be due, but your installment plan must pay off the tax due in at least three years. So if you can’t pay off the total amount before next year’s taxes come due, then the amount due might continue to increase. And although an installment payment plan may sound attractive, it might cost you more than even a credit card payment. The IRS charges a one-time $43 fee to process the plan, and penalties and interest are continually added to the unpaid tax bill until is paid off. The IRS can also file a federal tax lien against you, which won’t be released until you pay off your installment loan. This can affect your credit and purchasing power until the loan is paid.

The IRS offers a plan called "offer in compromise" which gives you the option of making a lump sum payment that is less than the total amount of tax you owe, if they foresee you having to make payments for years. However, this program is designed solely for people who truly need the negotiated bill, and most people should never consider this option. There is a $150 nonrefundable application fee for the request, and the IRS will review your financial situation in detail including future income potential. The program is intended for extreme cases, and few people qualify for it. Regardless of what payment method you select, you should make your decision early, to make your plans and avoid making financial problems and tax liabilities worse. Do your best to send at least something in with your return, to show the IRS your intention to pay, and to further reduce any penalties and interest that may accumulate.

7. Take your time and don’t panic. Filing taxes makes most people a little nervous, but getting an early start and being sure you have everything you need ahead of time will make the process go more smoothly. Research the IRS website or take advantage of the helpful instructional videos provided in your tax software program so you can take full advantage of every tax break for which you’re eligible. After your return is completed, be sure to give it a thorough once-over (or twice-over) to be sure everything is in good order. Be sure to send it no later than April 15. Once the whole ordeal is over, you may want to think back through the work you put into filing your return, so that you can make filing next year’s return easier. If your tax liability was higher than you expected, you can adjust your withholding amount at work by filing a new W-4 form with your payroll office. You’ll have to adjust to a slightly lower amount of take-home pay, but you won’t be faced with as big a bill from Uncle Sam next April. And depending on how you crunch the numbers, you may even get a refund.

The bumper sticker you’ve seen is true: The IRS has what it takes to take what you’ve got. But with a good solid plan, good documentation, good research, good decisions, and a little patience, you can prevent that from happening while keeping your blood pressure under control.