Filing income taxes is stressful for many people, but if you avoid some of the pitfalls, it can turn into a much more pleasant time of the year. Pay attention to a few aspects of income taxes to lower your stress level and manage your finances as advantageously as possible while remaining honest and within the law. Most importantly, think about your taxes throughout the year, rather than just during the days leading up to April 15.
Missing Deductions and Credits
Failing to claim tax deductions and credits for which you qualify could cost you hundreds of dollars, either by increasing what you owe or decreasing your refund. Avoid the pitfall of missing out on this money by checking your return carefully to see if there is any line you could fill in to get a deduction or credit. If you pay to have your taxes prepared, you should still look over the return before submitting it to ensure that the preparer did not miss anything. If you use tax preparation software, read each question carefully to find out if you qualify for the deduction or credit. If you self-prepare, have someone else look over your return or utilize a free tax help session in your community. You can also call the IRS at 1-800-829-1040 to ask questions about anything that confused you with regard to deductions or credits.
Poor Record Keeping
Many people have trouble filing income taxes because they have not kept adequate records during the year. If you save receipts for your itemized deductions and keep all of your January tax forms, such as 1099 and W2 forms, in the same place, this helps expedite the process of preparing your return. Plus, you need to have receipts to be able to prove your deductions if you are audited, so keeping these can save you significant amounts of money in the case of an audit.
Some people dread filing their income tax return each year because they owe taxes and cannot afford to pay them. Plus, depending on how much the bill is, the IRS might also charge penalties for failing to have enough money withheld during the year. The best way to avoid this pitfall is to decrease the number of withholding exemptions you list on your W-4 filed with your employer, which will increase the amount your employer withholds from each paycheck. Although your checks will be smaller, this helps you manage your money throughout the year so you aren't hit with a big bill in April.
Refund Anticipation Loans
Needing their tax refunds as soon as possible causes many people to take out refund anticipation loans from tax filing services. However, the cost of these loans is significant, and people should avoid them if at all possible. Instead, get an earlier start on filling out the tax return and file it electronically with the direct deposit option to get the refund within two weeks. Especially if you file in February or early March, your return gets processed very quickly and helps eliminate the need to pay for a refund anticipation loan.