Thinking about taxes yet? Perhaps you should be. In fact, keeping tax time in mind year-round can save a world of heartache in April, advises Paul J. Streer, a professor in the J.M. Tull School of Accounting.
To make tax time a breeze, keep records of revenue and expenses, stay organized and plan ahead. Keeping track of your yearly expenditures doesn’t have to be an arduous task.
“I have a simple system,” he said. “You can make a spreadsheet, or use a simple piece of paper. I just start at the beginning of the year and list every expenditure or receipt that has tax repercussions. I can see revenue from self-employment activities, expenses, charitable donations—and I have everything in one place. And at the end of the year, I don’t have to go rummaging through stuff.”
Evaluate business and personal decisions as they happen, keeping tax consequences in mind even if April is months away.
“Once you consummate a transaction, the die is cast,” said Streer. “It’s better to evaluate the consequences beforehand.”
By planning ahead and making intelligent estimates, Streer already knows where he’ll stand at tax time by the fall.
“It’s wise to have a reasonable estimate of where you stand before the end of the year,” he said.
This way, you can estimate what your tax bracket will be, which in turn can help you decide what steps to take before year’s end to cut your tax bill, as the value of deductions depends on your tax bracket. It also can help you decide whether to itemize your deductions.
Sometimes, the idea of getting a big refund seems like the only reward for filing your taxes. But Streer said that it’s actually better to have your withholding amount cut and get more money in each paycheck.
“It’s not a good financial move to get a large refund,” he said. “It’s forced savings with no return. People like to get a refund, but the truth is all you’re doing is lending the money to the government on an interest-free basis.”
You can change your withholding allowance by filling out a W-4 form, he said. If you are still holding out for the refund, resist the lure to get a refund anticipation loan, in which return preparers offer to loan you the amount of your refund until the actual refund rolls in—for a small fee, of course. Unless you’re absolutely desperate for the money now, just be patient, Streer said, and save paying the fee.
“The extra charge translates into a very high rate of interest,” he said. |
