Friday, March 21, 2008

It Is Tax Time!

It is time
This weekend I have to finalize and file my tax return. Nothing I look forward to but it is an annual ritual that I have learned to optimize. My tax pain reduction strategies include the following

Do it twice!
I do an initial tax assessment in early February. This early review gives me an idea about my tax return status – do I owe money or do I get a refund. If I owe money, I start putting some money aside to pay the eventual tax bill. This early assessment also allows me confirm the paperwork status. Do I have the required W2s, 1099 forms, charity receipts etc.?

Automation Rules
Tax preparation software may be pricey but I feel that it is worth the cost. I use TurboTax and its detailed interview style tax preparation style is very effective in capturing my income, expenses and tax deductions. Although limited, some institutions are starting to provide direct download to TurboTax which reduces my data entry requirement (a big reason for unintentional errors).

Preparation is Key
Every year I make a tax folder which I use to collect all relevant tax documents. Charity receipts, day care receipts, tax documents from the financial institutions – all goes in this folder. A key efficiency trick is to track down the tax paperwork when the event is fresh in your mind. I don’t know about you but rummaging through paperwork for something that transpired months ago is painful and time consuming.

No Pain No Gain
Tax time is an excellent opportunity to review your financial picture and plan out the next tax year. I usually run a scenario (provided in Turbo Tax) to project my next year’s taxes and correspondingly update my withholdings. It is never perfect but I usually try to withhold the right amount of tax. This is also an opportunity to review different IRA/ROTH options, Flexible Spending Account impacts and other tax situations which may reduce my tax burden.

File It Away
It is important to retain good tax records in case you are audited. Once I file my return I make final copies of all my tax returns (federal, state and local) and retire the whole tax folder. I backup the online copy and I am done.

If you have a plan of action to file your taxes, the process can definitely be optimized. Now the bigger question is how do you reduce your tax bill - but that is another discussion topic!

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