If you’re stressed, exhausted, or downright furious after submitting your taxes, it’s time to create a new system. Here’s how to make next year’s tax experience a little less traumatizing.
Taxes are a pain. Really, who wants to spend their free time dealing with itemized deductions and searching for documents? However, the longer you put off your taxes, the more you’re going to suffer in the end. That’s why it’s important to approach it in steps you can take all year long.
Do you sit down every year to file your taxes, only to discover you don’t know where you put all those statements, forms, and receipts? Suddenly, you’re tearing through folders and boxes, or digging through the recycle bin. Where, oh, where did that 1099 go? We’ve all been there.
The number one way to reduce tax-related stress is to get organized. Create a system that allows you to file important paperwork and emails the second they hit your inbox. Your goal is to have everything neatly tucked away in one spot.
Here are a few ideas to get you started:
- Email: Create a folder in your email called “Taxes 2020” (here’s how to do it in Gmail, Yahoo, or Outlook). Move all tax-related documents into that folder.
- Digital storage: Create a folder called “Taxes 2020” on your computer, too. As you receive documents in emails, download and save them in that folder. Make sure you also label each document appropriately, such as “1098-T.” If you prefer hard copies, print them out.
- Physical storage: If you receive or print paper documents, such as a W2, file them in a box or file cabinet. We recommend using one box for filing, since your goal is to keep everything in one spot. After you file, you can store the box in a closet or attic. You can shred everything after seven years.
For more help, check out the best apps to get your taxes done right.
Watch Out for Important Forms
Most tax-related documents arrive in the mail or via email sometime in January. Sometimes, you might have to log in on a website and download the forms yourself. A checklist is a great way to keep track of everything you’ll need and make sure nothing got lost in the mail.
Here’s a general list of the most common tax forms:
- W2: Issued by your employer, it includes your total earnings for the year, along with the total amount withheld from your paychecks.
- 1099-MISC: You’ll only receive this if you’re self-employed, an independent contractor, or if you earned money from prizes, awards, or anything else that fits under the “miscellaneous” category.
- 1099-INT: If you have any type of savings account, you’ll have to report the interest it earned on your tax return. You’ll receive this from your bank.
- 1099-DIV: This form will be issued if you received dividends or distributions from investments.
- 1098-T: If you incurred tuition expenses for college—either for yourself or a child—you’ll receive this form.
- 1098-E: Have a student loan? Chances are you’ll be able to deduct a portion of the interest you paid. You can expect a separate statement from each lender.
Keep in mind that the forms you receive depend on your work and life situation. For example, if you’re an independent contractor, you might receive several 1099-MISC forms, but no W-2 (unless you have a regular job, as well). If you don’t have a savings account, don’t waste your time searching for a 1099-INT form.
If you file a joint return with your spouse, make sure you include both of your expected forms on your checklist. Hang it up and cross off each item as it arrives. This way, you can make sure you have everything ready before you sit down to file your return.
Review Previous Returns
If filing your taxes gives you a pounding headache or ends in tears, we recommend pausing before you plow ahead. Dust off those old returns and thoroughly examine them. Note which areas caused you the most anguish in the past.
For example, perhaps you struggled to claim charitable donations on your last return due to poor record-keeping. Spend some time researching what you need to do better next time, such as storing the receipts or writing out a detailed list of what you’ve donated. Check out The Salvation Army’s donation value guide to get a general idea of what you can claim on your tax return.
Do your best to record all the details as soon as possible. Don’t trust your memory to remember all of these things a year later.
If you’re self-employed and struggle to keep track of your mileage, try using a mileage tracker app to automize all your business trips.
If you address all these problematic areas now, you’ll alleviate a lot of stress when you’re doing your next return.
Adjust the Withholding Method
Take a look at what type of tax refund you typically get. Even though receiving a generous tax return is nice, it’s better to have the money throughout the year. Therefore, it might be necessary to adjust your withholdings by redoing your W-4 form.
If you’re self-employed, you’ll have to stay on top of quarterly payments to avoid a hefty tax bill and any penalties when you file. Be sure to read up on self-employment taxes and make sure you’re doing things right.
When in doubt, reach out to a tax professional.
Learn About Self-Employed Deductions
Taxes go to a whole new level when you’re self-employed. Don’t worry, though—you can get through it without losing your mind.
First, it’s important to know which business expenses you can deduct. When in doubt, just keep all receipts and statements. Nothing’s worse than throwing away a stack of receipts, only to discover you could’ve deducted them on your tax return!
Next, we recommend using an accounting tool, like FreshBooks. Alternatively, you can just use a detailed spreadsheet. Either way, make sure you update your records every month. Don’t leave your bookkeeping until the last minute. Sorting through a year’s worth of receipts and documents right before a tax deadline is enough to make anyone cry.
Here are some common deductions for sole proprietors and small business owners:
- Advertising: You can include anything that promotes your business in this deduction, like flyers, brochures, business cards, social media ads, or website costs.
- Mileage: If you have to drive to see clients or conduct business, it’s a valid expense.
- Rental: If you rent office space or a building for your business, keep track of all expenses associated with it, including the rent and utilities.
- Home office: The IRS has strict rules about deducting expenses for a home office. If you’re eligible, keep track of your rent or mortgage, as well as all utility costs.
- Supplies: This applies to anything you use exclusively for your business with a life span of one year, such as paper, pens, print cartridges, and so on.
- Equipment: If you buy a desk or computer for your business, save those receipts!
- Contract labor: If you hire someone to work for your small business, it counts as an expense.
- Meals: Any time you have a business meeting over lunch, you should be saving that receipt. You can only deduct 50 percent of the cost of a meal, but that can add up over a year.
You can read more about common tax deductions for self-employed business owners here.
Take Advantage of Retirement Contributions
Setting aside money for retirement is always a smart move. Plus, you’ll be able to take advantage of some great tax breaks.
Make sure you stay on top of the current deduction and contribution limits, and do your best to sock away as much as possible. If you can, set up automatic payments that go directly into your retirement account, so you can keep up with your savings goals.
Not sure how much to save for retirement? A retirement calculator will give you a ballpark figure, and then you can go from there.
The last thing you want to think about after hitting “submit” on your tax return is next year’s taxes, but that’s the best time to tackle next year’s plan.
As we stated above, it’s important to keep track of business expenses and deductions if you’re self-employed.
You can also download tax software months before the tax deadline. This allows you to plug in details as you go. Tax software is user-friendly and guides you through the various deductions and categories. Plus, you can reach out to a tax specialist (usually for a nominal fee) right from the program if you’ve got a complicated question.
If you’re really disciplined, you can organize all your receipts and statements before the end of the year. Then, just wait for all the official tax documents to hit your inbox in January. With enough dedication and planning, you’ll be completely done by mid-February. Whew!
Although tax season is a dreaded time for many, it doesn’t have to be. Take charge of your taxes today by investing in accounting software, creating a solid organizational system, and using apps along the way. The more you do now, the easier it’ll be when that dreaded tax deadline looms once again. Good luck!