Tax day has come and gone for the year, and many of you are breathing a sigh of relief. Now you plan to kick back and enjoy the next twelve months and put taxes out of your mind until next April.
That’s a huge mistake.
If you want to make the most out of your yearly tax routine, you need to put together a game plan for next year. Here are the minimum steps you should begin taking today to be better prepared for your taxes next year.
Hire a Professional
Unless your taxes are simple enough to file using a 1040EZ, you will likely be well-served by hiring a professional to prepare your taxes for you. Chances are you’re already paying for tax preparation software, which means you’re out of pocket about $50 anyway. An informal survey on Dave Ramsey’s Facebook page revealed that the average return for self-filing individuals was $1,824 while the average refund for filers who hired a professional was $2,615. As you can see, the tax pro more than paid for themselves.
Tax software often leads users astray by not having any sort of checks and balances to ensure you’ve entered all your information correctly. The software doesn’t know how to apply all the deductions and credits for which you qualify—the best it can do is offer you options based on your input. Sure, tax software has gotten better and more intuitive over the years, but it cannot beat a professional with a working brain.
When you consider that a seasoned tax pro understands the intricacies of current tax code and can not only get you the largest return possible but also ensure that your taxes are filed properly, you begin to understand the benefits of paying their fee. Don’t overlook the added bonus of not spending hours and hours working on all that paperwork yourself—that’s what you’re paying the pro to take care of!
If you’re an entrepreneur, you’ll discover that a reputable tax pro is worth their weight in saved money. Why wade through all that red tape on your own? A professional knows how to find all the deductions and credits for which you qualify while ensuring you meet your legal obligations.
Don’t already have a tax pro in your corner? Ask your friends for recommendations, or check out one of Dave Ramsey’s Endorsed Local Providers.
File Your Taxes Early
Why wait until April 15 every year to file your taxes, especially if you’re going to hire a pro? Starting now, get a file folder and begin collecting all the relevant information you’ll need for next year’s taxes—things such as investment income statements and mortgage interest statements. If you plan on itemizing deductions, you’ll need to collect receipts for your charitable donations, child care expenses, college expenses—basically anything and everything your tax pro is going to need.
After the first of the year, place your W-2s and 1099s in your folder, along with any other relevant documents. Remember, most of your tax documents are required by law to be in the mail and headed toward you by January 31 each year. If you haven’t received all your documents by mid-February, you need to get on the phone and find out what’s going on.
As soon as you’ve received all your statements, schedule an appointment with your local tax pro. Not only does this get it all done and off your mind sooner, it also gives your tax pro more time to work on your filing. A tax pro’s schedule tends to fill up fast in the last month or so before the deadline, so you want to beat the rush and get your paperwork to them as early as possible. Don’t forget that even the best tax pro is human, and no matter how hard they try or how experienced they might be, they’re also feeling the crunch in the weeks leading up to April 15, which means they’ll be more prone to mistakes.
Don’t Look Forward to Getting Anything Back
There was a day when I looked forward to tax season because I was pretty sure I was going to get a return. In my immaturity, my plan was to take that “unexpected windfall” and spend it. Tax refund day felt like Christmas.
The truth is that what really happened is I allowed the government to take too much money out of my paycheck—essentially giving Washington an interest free loan. Wouldn’t it be better to keep that money and use it to pay off debt or invest?
Think about it. The average tax refund in 2014 was $3,096, and is expected to rise higher every year. That’s $258 per month the average tax payer could be putting to good use rather than sending it to a government who’s more likely to waste it than use it wisely.
How much faster could you get out of debt if you applied an extra $258 per month to your bills? What if you invested that money instead? An investment of $258 per month over the course of 20 years would end up being worth between $120,721 and $249,843.
How’s that 0% interest loan you’ve been giving the government looking now? Of course, the key to using that saved money is to put it toward debt or savings, not use it to justify a new monthly payment.
Your goal at tax time should be to pay nothing and not get a big lump sum back from Washington. For starters, use the Withholding Calculator at IRS.gov to find out how to properly fill out your W-4 at work. Has your family situation changed since you last filled one out? It’s time for an update.
Better yet, sit down with your tax professional and ask their advice to find out how to best set yourself up to keep as much money as possible in your paycheck.
Say “No” to Shortcuts and Tricks
Don’t fall prey to taking shortcuts with your taxes. You’re only one audit away from major financial and legal difficulties if there’s anything fishy going on with your taxes.
There are also so-called “smart tricks” that some tax pros may try to persuade you to take advantage of—things like whole life insurance policies, annuities, and holding on to your mortgage. Sure, there are tax breaks available for some of these practices, but if you sit down and do some critical thinking you’ll learn that you’ll be far better off pursuing investment vehicles like matching 401(k) plans at work and Roth IRAs, or paying off your mortgage early and investing the savings. In the long run, you’ll earn exponentially more money from investing than from tax breaks.
What About This Year’s Refund?
If you received a sizable tax refund this year, what’s your plan? Instead of blowing it, why not stick it in a savings account at the bank while you take some time to consider the wisest use of your funds?
My advice is to follow Dave Ramsey’s Baby Steps, which means making sure you have a starter emergency fund of $1,000 saved up and then throw every extra dime at your debt until it’s paid off. If you’re out of debt, make sure you’ve got an emergency fund of 3-6 months worth of expenses, then look into saving for retirement and college, and paying your home off early.
Also published on Medium.
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