Doing taxes is almost always complicated. After all, there's a lot of paperwork involved, and the cost of mistakes can be high if you underpay and owe penalties or provide incorrect info and find yourself the subject of an audit. And at the end of the process, there's also a very real chance you could end up owing the government money, which is never fun.
The good news is that there are steps you can take to try to keep your tax costs down and to make sure you're doing your paperwork properly. In fact, here are five tax tips that could help make the whole process much easier.
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1. Always take advantage of tax-advantaged savings accounts
You're eligible to contribute to a 401(k) if you have a workplace plan or if you're self-employed and open a Solo 401(k). You can make tax-deductible contributions to an IRA if neither you nor your spouse have a retirement plan at work, or if your income is below certain limits if you have access to a workplace plan. And you can contribute to a health savings account if you have a qualifying high-deductible health plan.
Once you contribute, money in your 401(k) or IRA will need to stay there until you reach retirement age and begin making withdrawals -- otherwise you'll incur a 10% penalty for early withdrawals. HSA funds can be withdrawn tax free at any time if used to pay for qualifying healthcare expenses. You can also withdraw these funds without penalty for any purpose after reaching the age of 65, but you will have to pay tax on withdrawals if they're not used for medical care.
Contribution limits change annually for HSA, 401(k), and IRA accounts. You can make contributions to these accounts as late as tax day for the relevant tax year. For 2018, you could make contributions until April 15, 2019. You can achieve significant tax savings with your contributions while also helping to ensure you have the money you need in the future.
2. Keep all your tax paperwork together
You'll need lots of paperwork to file your taxes, including forms from your employer and companies you do contract work for, your student loan or mortgage interest statements, and receipts to back up any deductions or credits you plan to claim.
You don't want to be missing paperwork you need to fill out your tax return, and you definitely don't want to lack documentation in case of an audit, so keep all the necessities together throughout the year. As tax forms come in or you incur deductible expenses, put them in a box or folder. Then, when it comes time to file your taxes, you'll know just where to look for everything you need.
3. Make use of the tools the IRS provides
There are important decisions to be made when you file your taxes, such as whether you'll itemize or claim a standard deduction, which filing status is the right one, and whether your child or someone else you're supporting qualifies as a dependent. The decisions you make on all these issues can have a major impact on the amount you pay in taxes.
Fortunately, the IRS has tools available that can help you make the right choices. You can use this IRS tool to find out your filing status and this one to see who you can claim as a dependent. The IRS also provides info on the standard versus the itemized deduction. If you can deduct more by itemizing -- or claiming deductions for specific things such as paying mortgage interest and state and local taxes -- then you should itemize. Otherwise, claiming the standard deduction is better to maximize your savings.
4. Don't wait until the last minute to start the process
Tax day is April 15, or the next business day if the 15th falls on a weekend or a holiday. You don't want to wait until the last minute to get your paperwork together, though. It can take time to fill out tax forms, especially if you're missing things you need such as a 1099 from a company you did contracting work for or tax forms from an investment account.
If you fail to file your taxes on time, you could incur a big penalty that starts accruing the day after you miss the deadline. Start completing your forms early so you don't have to scramble or worry.
5. Get the tax help you need
If you're not sure where to start when doing your taxes -- or how to maximize your tax savings -- it pays to either use tax software that can guide you through the process or get help from a tax professional.
There are several different e-filing software programs you could use to file taxes electronically for free if your income is under $66,000 as of 2019. The IRS has a list of programs and a tool to help you find one that's free for you. Different programs have different income limits for free filing, so check each program out carefully. Many of the software tools use plain language to help you identify ways to save on taxes and to walk you through form completion.
You can also get free tax help if you're a senior, have difficulty with English, are disabled, or make $55,000 or less. The IRS has a website that shows you where to find volunteer tax help in your area. If you can't qualify for free help and don't feel a software program will provide enough guidance, consider paying a tax professional. The fees you pay could be far less than the savings you get from making the right decisions when filing.
Follow these tips to avoid mistakes -- or overpaying the IRS
These tips can help you make sure you get your taxes in on time, avoid costly mistakes, and don't end up paying the IRS more than you should. Check out our beginners' guide to filing taxes to learn more.
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