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Money Tip: How to Prepare For Taxes Every Year and Reduce the Stress of Tax Season

There are two yearly financial events in most peoples lives, Christmas and Tax Season. I recently posted about how I prepare for Christmas with my steps to prepare for the holiday throughout the year with very little effort at all. It not only saves me time and stress, but a significant amount of financial burden as well.

The same can be said for Tax Season. With a little preparation and a little automation, tax season can come and go without any problems, stress, or worry.

Granted there will be individuals that have more complex taxes than I do, those that own a side business perhaps, but the general thought process is the same.

1. The Argument Over Whether to Exempt Or Not. I’m going to start my list out with a controversial topic, whether to file all of your exemptions or not. I do not file any exemptions, simply because I absolutely do not want to owe money. People will argue that getting a tax return means you are giving an interest-free loan to the government, and they are right, but it’s a very disciplined, “out of sight out of mind” method to save up money at the end of the year with a purpose. Some people are disciplined enough on their own to set aside money for debt payments or vacations, this is simply a method of doing that which will also ensure that you are not going to be struggling come tax season to scrounge together money that you happen to owe because your exemptions screwed you over.

2. Have Two Envelopes for Receipts. I have one of those metal magnetic boards in my office with two envelopes clipped to it. One is filled with my medical receipts, the other with my charitable donation receipts. I can compare these to my MS Money file since it also shows all medical and charitable related transactions so I have a double record.

If you don’t always have a paper receipt, but instead an email, create a folder for “Tax Receipts” in your e-mail box and file it away until you’re ready to start processing them (and possibly printing them out).

When it comes time to do taxes, now you have everything bundled up into two organized piles to give to your tax preparer and file away at the end of the tax season.

3. Use a Financial Tracker. I use MS Money to track every cent that goes in and out of my accounts. So long as I categorize everything correctly as I go along (and come on, this isn’t very hard to do), MS Money has a “Tax Transactions” screen that I can print out with every tax related transaction throughout the year. Here I can then mark off which I feel are invalid and have a running tab to compare to my receipts in #2 above if I need. It also may show me something I “forgot about” from the previous year that would also be considered a potential deduction.

4. Set up a Google Doc Summary. This is something I started doing three tax seasons ago, and it’s a time saver when it comes to going through tax deductions. Since I’ve served on the board of a charitable organization for the last 7 years, my mileage counts towards a tax deduction. But who is going to remember mileage at the end of the year? By having a google doc available to mark down the days I drive to the organization, I can easily tally up this information come January from anywhere I have an internet connection. The same can be said for inputting all the little numbers in a nice listing from my W-2, my freelance work, my retirement accounts, etc. so they are all in one place when I need to reference it while doing taxes.

5. Stay up to date on new tax laws. There are several mailing lists you can sign up for on the IRS website that will keep you up to date on the new tax laws that come out every year. Your certified tax professional should already know these, but it’s good to stay self-educated as well. Every year something may change that could increase or decrease your tax return. Maybe the 401k contribution increased and now you’ll have time to get that extra amount in to receive all the benefits from your retirement savings?

6. Gradually Save Up for Known Expenses. I live in Pennsylvania, which means I pay Federal, State, and Local taxes, but work does not take money out for local taxes. I estimated how much I would pay every year (and adjust accordingly if I have a significant raise like this year), and divided that up by 12 months so I knew how much each month to set aside to pay for local taxes. That way this isn’t coming out of my “return”, or adding onto my balance if I happen to owe taxes (which I never do).

I also took the First Time Home-Buyer Tax Credit in 2008, which unfortunately is the one where I have to pay back $500/year until it is paid off. Granted this helped me pay off my car, so it saves me a ton of money in the long run, but JUST in case I get close to owing taxes sometime I don’t want this $500 to be added on top of that. Instead I save up an additional $500 each year to make up for this buffer so if I do owe, I have the extra money to take care of it. If I don’t owe, then I have a $500 bonus to use for whatever I want (which would likely be paying down debt or putting into my emergency fund).

7. Automate Your Tax Payments. I don’t do quarterly tax payments, but I know a lot of people that do. Putting money away each paycheck to cover these is a simple and easy way to make sure you have the money each quarter, or if you’re like me, at the end of the year if needs be, for things like local taxes.

8. Create an alternative savings account. I have a savings account I use for periodic savings like taxes, 6-month car insurance policy, quarterly life insurance payment, or if I plan to do a purchase like brand new tires for my car this year. This way this money is sitting in an account that I know not to touch rather than combining it with my emergency savings or a generic savings account where I might use the money without thinking about where it might affect my finances later. This isn’t necessarily just useful for saving up for taxes you might owe, but really useful for other things you want to save money up for as well.

To note, I keep this account separate from the Christmas fund.

These are just a few ideas that might help remove some of the stress from tax season each year. Because of the methods above I actually look forward to tax season because I know I will not owe money and receive a refund, and I know I’ll have all my papers already prepared ahead of time. It’s just a matter of sitting down one day and getting my taxes done.

Do you have any tips for preparing for tax season each year?

About Crystal Groves, Google+

Crystal Groves is a farmer, web developer, musician, blogger, and personal finance enthusiast from the back hills of Maryland and Pennsylvania. She started Money Drain as a project to encourage people interested in fixing their financial situation to share their stories and learn from the stories of others. We all make mistakes, but in order to change we have to make changes.

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One Response to Money Tip: How to Prepare For Taxes Every Year and Reduce the Stress of Tax Season

  1. Pingback: Money Drain in Carnival of Personal Finance #348 | The Money Drain

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