Tax season will be here soon, and getting prepared now will save you a lot of headaches later in the year.
"Spend time wisely before you file," said Mark Daniel, an accountant with Rhodes-Murphy Income Tax Service. "The first thing to do is get your final documentation in order. A lot of people rush in too early and have to amend their filing later."
The filing process for most taxpayers begins with receipt of their W-2 forms, which contain salary and tax information from the previous year. Many people also receive Form 1098 and Form 1099, which cover deductible mortgage interest and taxable investment income, respectively.
Federal law requires all applicable forms be mailed to taxpayers by Jan. 31.
With the exception of businesses, the tax return system operates on a calendar-year cash basis for most people.
"Only what you receive is what you have to report as income, and you can only deduct what you have actually paid. Everything has been done to you by Jan. 1," said Karen Stinson, a tax consultant for H&R Block Premium.
Historically, April 15 is the deadline to file a return. But this year April 15 falls on Sunday, so the deadline is April 16, she said.
Minor mistakes on returns, such as basic arithmetic errors, can delay any refund a taxpayer may have coming. Common mistakes include incorrectly looking up a tax or forgetting to transfer the right numbers, Mr. Daniel said.
Simply forgetting to sign the documents can result in a two- or three-week delay in getting a refund, he said.
Ms. Stinson said taxpayers should pay particular close attention to forms with sections labeled "gross amount" and "taxable amount."
"Make sure you transfer the taxable amount onto the forms," she said.
Those who discover they cannot complete their return by the deadline have a few options.
Anyone can be granted a four-month extension for filing. Some are allowed to request another two-month extension after that. But, as Mr. Daniel said, the filing extension is not an extension on actually paying any taxes owed.
The Internal Revenue Service allows those who can't pay their full amount owed to send in monthly payments. Just mail in the Installment Agreement Request (Form 9465) along with the tax return.
For those expecting a refund, filing electronically can get them their money faster. The IRS scans the taxpayer's return and can have a check in the mail within 10 days, sooner if the money is to be directly deposited into a bank account.
Mr. Daniel said electronic filing saves millions of dollars for taxpayers.
"The error rate is lower, there is less paperwork, and you get a refund a whole lot faster," he said.
He said the IRS is pushing to have 85 to 95 percent of returns filed electronically within five years.
Everyone is allowed to file their own returns. But those seeking help from professional tax preparation services can expect to pay fees ranging from $50 to $100. Charges can be higher if the return is more complex and requires additional forms.
1. Keep better tax records. Save documentation for tax-deductible items, child care and medical expense receipts, charitable contributions, business-related expenses, real estate taxes and mileage.
2. Organize your records. Financial software and folders can help organize information so you can better locate documents to file efficiently and pay taxes on time.
3. Save for retirement. Retirement plans, such as IRAs, Keoghs and 401(k)s, can help reduce your yearly tax bill. The sooner you start planning and saving, the better. Ask your financial planner.
4. Review W-4 withholding. Plan ahead to withhold enough from your pay to avoid an underpayment penalty at the end of the year. Also avoid overpaying so you can put your money to use throughout the year instead of waiting to receive a refund.
5. Get tax credit for classes. If you, your spouse or a dependent child take higher education classes, take advantage of the Lifetime Learning or Hope Scholarship credits.
6. File your tax return electronically. Not only will you not have to worry about the post office losing your return, you can cut about four weeks off the delivery time of your refund check.
7. Know your rights as a taxpayer. Ask your tax preparer for IRS Publication 1, which is information on your rights in audits, appeals or collection procedures.
8. Invest in a home. Mortgage interest is deductible on Schedule A if you itemize. Also, if you own and live in your home for at least two of the five most recent tax years, you can exclude gains of up to $500,000 ($250,000 for single filers) when you sell.
9. Start saving for your child's education. An Education IRA can be a great way to help fund a child's college education. A maximum of $500 per beneficiary can be contributed per tax year. The earnings will grow tax-free, and withdrawals will be exempt from taxes if used for qualified education expenses.
10. Deduct student loan interest. You might be eligible to deduct up to $2,500 (for 2001) of student loan interest on your tax return every year for the first 60 months of repayment.
Source: H&R Block
Reach Jennifer Bishop at (706) 823-3217.