It is probably the most dreaded day on the calendar for many people, and it is right around the corner: April 15, the deadline for most Americans to file their income tax return. This dread usually stems from two primary factors: the fear of having to write a large check payable to the Internal Revenue Service; and/or the amount of time needed to gather and organize all of the paperwork, tax forms and receipts that are needed to prepare your tax return. This is true even if you hire a tax professional to prepare and file your tax return — because you still have to pull all of this together for him or her.
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With just a few weeks remaining before the tax-filing deadline, it is probably time for you to shift into high gear when it comes to preparing your tax return if you haven’t yet. Here are five steps to get you started:
1. Contact your tax professional. - Filing income taxes has gotten so complicated that the majority of Americans now use a paid tax preparer to help them file their tax return. If you are among this majority and you have not contacted your accountant or CPA to arrange a meeting to discuss your taxes yet, pick up the phone to do so right now.
If you do not have an accountant or CPA but would like to hire one for tax help, start out by asking friends or associates whom you trust for a recommendation. But don’t settle for the first tax professional who says he or she can meet with you. Perform some research to check on the qualifications and credentials before hiring a tax professional — for example, do an Internet search on the individual or firm and see what comes up, or check with your local Better Business Bureau or state board of accountancy.
2. Examine tax preparation software. - If you are a tax return do-it-yourselfer, you can save some money by using tax prep software instead of hiring a tax return professional. Depending on the complexity of your return, you can probably buy a tax prep software program for anywhere between $10 and $80. Even better: if your taxable income was below $60,000last year, you can use the IRS’s Free File tax prep software to prepare and e-file your federal income tax return for free.
Meanwhile, the average cost of hiring a professional to prepare an itemized federal and state return is $273 , according to the National Society of Accountants. If your return is complicated — if you operate a side business, for example, or have a lot of investment income and/or losses — the cost could run even higher, but it still might be smart to bite the bullet and hire a pro. Doing so could easily pay for itself in terms of both time saved and a potentially larger tax refund.
3. Get all of your paperwork organized. - Whether you work with a tax professional or prepare your tax return yourself, plan on setting aside some time to get all of your tax documentation and forms together either before your meeting with your CPA or before you sit down at your computer. Start by pulling out (or pulling up) last year’s tax return — this will serve as a good roadmap for getting started on this year’s return.
Other important forms you’ll need are your W-2 Form from your employer, Forms 1099-MISC from clients who paid you last year (if you’re self-employed), and bank account and brokerage statements like Forms 1099-DIV, 1099-INT and 1099-B. In addition, you’ll want to gather receipts to support any deductions you plan to claim on Schedule A, Form 1040 (see below).
4. Determine your deductions. - Each year, Americans over-pay their taxes by millions of dollars by failing to claim legitimate deductions on their income tax returns. While it is easier to just claim the standard deduction — $6,200 for singles, $9,100 for heads of household and $12,400for married couples filing jointly for 2014 returns (all under 65 years of age) — doing so could be leaving a lot of money on the table.
You could increase the size of your tax refund substantially by itemizing your deductions instead. Doing so requires careful recordkeeping throughout the year and the filing of Schedule A (Itemized Deductions) along with your Form 1040. Among the expenses that you might be able to deduct are contributions you made last year to qualified charitable (or501[c][D]) organizations, sales taxes or state and local income taxes (but not both), mortgage interest and points paid on a new mortgage or mortgage refi, expenses incurred while looking for a new job, and contributions to some qualified retirement plans (see below).
If you operate a business out of your home, even if it is just a part-time or freelance business, you should determine whether you qualify for the home office deduction. You may qualify for the deduction if your home office is used exclusively and regularly as your principal place of business or it is used regularly to store product samples or inventory, as rental property or as a home daycare facility.
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5. Make a last-minute retirement plan contribution. - You can make a 2014 tax-deductible contribution to an Individual Retirement Account (IRA) or Simplified Employee Pension plan (SEP) all the way up until the April 15 tax-filing deadline. This is a great way to lower your tax bill and possibly increase the size of your tax refund.
For tax year 2014, you and your spouse can each contribute up to $5,500 to an IRA (or $6,500 if you are age 50 or over but under age 70 1/2 at the end of 2014 ). If you are self-employed or own a small business, you can deduct contributions to your employees' SEP-IRAs of up to $52,000 per participant or 25 percent of the compensation (which is limited to $260,000 per participant), whichever is less.
If you hear a faint ticking sound in the background, that might be the clock ticking down to the April 15 tax-filing deadline. At this point, you don’t have much time to lose: Now is the time to start preparations for filing your tax return. Following these five steps is a good way to get started — and also possibly maximize your tax refund.
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