The beginning of a new year – A time when many folks typically take stock of their goals and ambitions. Poor habits they wish to break are identified and some good ones they would like to develop are acknowledged.
Here’s one to add to the list, and it is no less in importance than many others – Make sure your tax affairs are in order.
From timely tax return filing to making certain you do not owe, here are 10 tips to ensure your upcoming calendar year is free of tax trouble.
1. Check your Federal Income Tax withholding
The biggest reason taxpayers owe on their tax returns come April 15th is that they have elected to be under-withheld for Federal taxes, whether they realize this or not. If you owed on the last return you filed, and have not yet corrected the issue, now is the time to address it.
Use Form W-4, Employee’s Withholding Allowance Certificate, to make changes to your existing exemptions to tax. Make sure you have completed the form both legally, by not over-inflating your exemptions to a figure you are not entitled to take, and appropriately. Just because you can claim certain amounts does not mean that it is in your best financial interests to do so.
For detailed instructions on how and when to change your W-4, see the article Federal Tax Withholding Requirements for Wage Earning and Self-Employed Taxpayers.
2. Start making Estimated Tax Payments
This one is for all of us who are self-employed. Since we do not have an employer to withhold taxes for us, it becomes our obligation to do so. In fact, the IRS requires that estimated tax payments be made if income from self-employment is high enough.
Here is the general rule – Estimated tax payments should be paid in during the tax year if both of the following apply:
- If, after subtracting any credits you are eligible for along with any federal withholding from any other income sources, you expect to owe at least $1,000 in tax, and…
- The credits and withholdings are less than 90% of your current tax due or 100% of the tax due on your previous year return,
…Then, you are required to make estimated tax payments.
The rule has some exceptions, and we also need to know when the payments are due and how to go about making them. Also, does the IRS charge a penalty if they are not made?
Answers can be found in the related article Do I Need to Make Estimated Tax Payments to the IRS?
3. Develop an orderly filing system
You’d be amazed at how a good routine of keeping expenses and tax documents neatly inventoried can both prevent a tax balance, as well as address any potential audit.
If you are a self-employed sole-proprietor or operate a small business, then you likely are aware of the multiple business expenses that you may be able to deduct on your 1040 Schedule C.
Amounts paid for your goods, advertising, vehicle expenses, asset depreciation, gifts to clients or suppliers, meals & entertainment, legal services, office supplies, insurance, travel expenses… this list is by no means all-inclusive. All can be deducted, and if you are asked to verify them, you will need to produce a hard-copy record.
Keep your files neat, claim only what you can substantiate, and avoid ‘estimating’ because you don’t want to put the work in to figure out the actual number.
This article may help you: How Long Should I Keep my IRS Tax Records?
4. File and pay on time
Easy to say, at times hard to do. We all know that April 15th is the due date for tax returns. So why do we put it off? Perhaps because we tend to wait until the beginning of April to even start thinking about getting organized, which speaks to point #4.
If you cannot get your return in to the IRS on time, make sure you request an automatic 6-month extension by submitting Form 4868 on or before the April 15th. Remember too that an extension to file is not an extension to pay. The IRS still requires you to make a payment by the 15th of April that covers any potential tax due; you may be penalized for any shortfall.
What Happens if I do not File my Tax Return on Time?
5. Don’t pay for unnecessary tax preparation or representation
Taxes by nature are complex. But don’t let this moniker apply to each and every tax situation you encounter.
If you have a relatively simple tax return to prepare, then chances are you can do so for free. Every year, the IRS partners with reputable companies for free tax return preparation and electronic filing directly through the IRS web page. Check out the links for FreeFile and IRS E-File on the IRS home page.
If you have a tax balance or are receiving threatening letters from the IRS, then keep in mind that there are no options available to any third party tax preparer, lawyer, CPA or anyone else that are not available directly to taxpayers. The IRS will work directly with you to help you understand why you owe, how to prevent future tax balances, and will assist you in setting up various repayment plans.
If you’re still unsure, check out Representation Before the IRS – What you Need to Know and Tips for Choosing a Tax Professional.
6. Don’t get caught up in a Frivolous Tax Scheme
The overall majority of us recognize their legal responsibility to properly report and pay their tax obligations to the IRS. At the same time, the IRS has identified common frivolous ‘legal arguments’ made by individuals and groups who oppose compliance with the federal tax laws.
These so called tax ‘loopholes’ are everywhere, and some appear to be very legitimate upon a cursory review. The average Joe and even celebrities have fallen victim to these appealing de-taxing or un-taxing systems that tickle the ear. If you see these 20 celebs, just ask them.
Tax Fraud and Frivolous Arguments – How Can I Avoid IRS Civil Penalties?
7. Take charge of any past-due delinquent tax debt
You certainly do not have to wait for an IRS notice to come in the mail in order to address your balance. When a return is filed, you obviously are aware if an amount is outstanding. If you are not in a position to pay it off within a few weeks or a month, send in your return with Form 9465, Installment Agreement Request.
It can be as simple of that. Continuing to procrastinate on your tax balance is what forces the IRS to take enforcement action, such as a levy on income and bank accounts or the filing of a Notice of Federal Tax Lien. Contact the IRS immediately upon learning you have an un-paid tax balance.
What Should I do if I Owe the IRS and I Can’t Pay My Taxes?
8. Understand your Appeal Rights
Should you find yourself with a tax problem, you need to understand the various appeal rights you have and exercise them as needed. The IRS allows for a taxpayer to appeal almost all actions relating to the collection of unpaid tax.
How to Request an Appeal with the IRS
9. Understand what things may impact your tax refund
When you file a tax return, you may end up owing the government money, or else you will be eagerly awaiting your refund. If you are in the latter category, here are 10 facts regarding refunds that you should be aware of:
10 Federal Tax Refund Tips you Need to Know
10. Change your address with the IRS
If you are moving or have moved, you doubtlessly have put together a long check-list of what needs to be done. Changing your address with the Post Office is likely one of the items on there. Changing your address with the IRS needs to be added as well.
Because of the sensitive information contained in Federal mail, most post offices will not forward IRS mail to your new address, even if you have filled out a forwarding address request. Expected tax documents, refund checks or time sensitive letters may be returned to the IRS as undeliverable.
How to Change Your Address with the IRS