by Nancy Osborne, COO of ERATE®
We all agree that we pay too much in taxes, however few of us know exactly how much we actually fork over to Uncle Sam each year. Most of us simply recall whether or not we wrote a check in April or ultimately cashed a refund check. When you file your federal tax return you are simply reconciling what you paid throughout the year with what Uncle Sam says you really owed. That reconciliation process completed on your part, or on the part of your tax preparers, is based on your total earnings and deductions. Many taxpayers actually feel lucky and somewhat relieved when they receive a refund, however a refund should never be your goal as it implies that you overpaid Uncle Sam and provided him with an interest free loan, essentially giving the government free money for the period of time they held onto it. Of course you know what would happen if the situation were reversed and you owed the government money, you would likely owe interest and penalties, nothing resembling a free loan. Whether you have a tax professional help you or you go solo and try to prepare your return on your own (or with the help of consumer tax preparation software) here are some helpful tips to assist you throughout the year in being better prepared when it comes time to complete and file your return.
Tip # 1
Withhold the correct amount of taxes. Re-stated here again for emphasis, do not seek a large tax refund, the money you pay to Uncle Sam is in fact yours, hold onto it and invest it for yourself. Conversely do not underpay the taxes you owe either as this could prove to be quite costly in the form of interest and penalties owed. Make the necessary adjustments to your W-4 and withhold only what you owe or get as close to that figure as possible.
Contribute the maximum amount possible to any and all tax-deferred retirement plans (and if eligible to a Roth IRA) so you can kill two birds by both saving taxes and investing for your future retirement. Start early and take advantage of the enormous impact of tax deferred compounding.
Maintain good tax records. If you continuously stuff a drawer or file folder full of records and receipts, do yourself a favor and put together an organized, labeled filing system that is categorized or indexed. Tax season always comes upon us all far too quickly and most of us seem to struggle to get things done by April 15th. Organized tax files will both simplify the process and save you time spent frantically searching for records and receipts.
Select the correct filing status. When in doubt, complete your return under both scenarios and see what outcome produces the most favorable tax result for you. Tax software makes this fast, easy and will help you save money if you do it right. Your tax advisor can help advise you here also.
Take advantage of tax deductible mortgage debt rather than consumer debt, recognizing that mortgage interest is in fact deductible on your tax return while consumer interest is not. This should make home equity the preferred financing vehicle for those big ticket items you cannot pay for in cash. However there are limits to this deduction depending on how and when you set up your mortgage(s) at the time you purchased your property. Verify with your tax advisor to make sure you fall within the limits, especially for equity loans that exceed $100,000.
Don't avoid capital gains taxes by simply refusing (or endlessly postponing) to realize a profit or gain. Many investors shy away from realizing a gain just for tax reasons. How could one ever go wrong making a profit? That is the objective of any investor. Of course whether the underlying asset sold would qualify for long vs. short term capital gains is an important consideration and one should consult with their tax advisor when making the important decision to sell.ÃÅ¸
Always review the previous year's tax return for pertinent carry forward items. For example you may have losses you want to carry forward from the previous year's return and apply to the current tax year. A deduction that cannot be fully utilized within a given tax year may need to be applied to subsequent tax years. Always keep track of your prior year's deductions and the amount remaining to be deducted.
Double check to make sure you've attached the correct forms and always make copies of your returns, both federal and state, for your records. Also include a copy of your federal return when you file your state return. Also don't forget to be sure you include the correct copies of your W-2's and attach them in the appropriate sections.
Get tax assistance early on in the process. Don't wait until it's too late, making a mistake can be costly any way you look at it. If you have a complicated financial picture, seek the help of a tax professional early on to help you with your short and long term tax planning. This will save you money, time and stress. In the event you do make a filing error you may want to consider filing an amended tax return for that period.
Try to be on time. April 15th is one of the most dreaded days by Americans, it is the day of reckoning with the IRS. If you are employed then your taxes have been withheld throughout the prior year and were deducted automatically from your paycheck. If you are self-employed then presumably you have made estimated payments on your taxes throughout the year; your quarterly payments were due on April 15th, June 15th, September 15th and January 15th. If you are unable to file your return on time then file an extension request and pay whatever taxes you think you might owe. An extension request and approval do not excuse you from paying what you owe and failure to do so could result in your having to pay interest and penalties. August 15th is the date to request a second extension if you are unable to file your return until October 15th, the final deadline for the prior year. Note that according to the IRS, beginning in 2006, the August (or second) extension request is no longer necessary, as the first request will cover both dates. Also it is possible you do not need to request an extension unless you actually owe taxes, but it always a good idea to send one in either way.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.