Posted on 03/23/2013 8:44:27 AM PDT by Kaslin
Dear Carrie, I always put off doing my taxes until the last minute and then I'm never sure if I'm doing them right. How can I make this process less painful? --A Reader
Dear Reader, Doing your taxes can seem like a huge chore, but for many people, it's really a simple process. The key is a little upfront organization. That way, whether you're using an online tax prep program or old-fashioned paper and pencil, you'll have the information you need handy and can plug in the numbers.
Even if your financial situation is more complex and you need the help of an accountant, being prepared can save you time and money.
Have identification numbers handy
While this may seem obvious, not having all the necessary Social Security or other tax ID numbers handy can be the first frustration when sitting down to do your taxes. If you're single, no problem. But if you're married and have dependents, make sure you have all of their Social Security numbers in front of you before you get started. You'll also need their birthdays.
Collect documents that show your earnings
There are different forms to designate different types of income. If you're an employee and your regular job is your only source of income, the only form you'll need is your W-2 from your employer. This will show what you've earned and the taxes you've already paid through withholding.
However, if you have other income, for example from interest, dividends, capital gains, freelance work or Social Security, you should also receive 1099 forms that show how much you've earned. These forms are sent to the IRS by the issuing institution, so it's important that you report all of this income, no matter how small the amount.
Companies are required to mail these forms by the end of January each year. If you don't receive them sometime in February, make an effort to follow up.
Even if you don't receive an expected 1099, be sure to include the income on your tax return.
And if you received income that won't be reported on a W2 or 1099, such as self-employment income or alimony, you're not off the hook. You also need to include this income on your return. Best to have some sort of written documentation, whether it's a bank statement or your own records.
All this adds up to your gross income.
Gather documents that reduce your income
What you've earned is only one side of the equation. Equally important is documentation for what are called "adjustments to income." These include things like IRA contributions, contributions to health savings accounts, alimony paid, qualified student loan interest, higher education expenses, moving expenses if you moved for a new job and more.
Add up these adjustments and subtract them from your gross income to get your "adjusted gross income" or AGI.
Have appropriate records and receipts for itemized deductions
The next step is to decide whether to itemize or take the standard deduction. Itemized deductions include things like mortgage interest, medical and dental expenses that exceed 7.5 percent of AGI, state and local taxes, property taxes, charitable contributions and casualty and theft losses. If the sum of these amounts is more than the standard deduction, that's the way to go. Otherwise, simply take the standard deduction, which is $5,950 for singles, $11,900 for married filing jointly in 2012. If you decide to itemize, make sure you have records and receipts to prove your expenses in case of an audit.
Now subtract your personal exemptions ($3,800 for 2012) from your AGI to get your taxable income. You get one exemption for yourself, one for your spouse if married filing jointly and one for each qualified dependent.
When you know your taxable income, you can start to calculate the taxes you may owe. Remember, taxes are progressive, meaning you pay a proportionately larger amount of taxes on higher levels of income. That results in significant pieces of information: your marginal rate, which is the amount you pay on your last dollar of income (important to know, for example, when you get a bonus or other extra income) and your average rate, which is the average amount you pay taking into consideration all of your income (important when you're figuring out the tax impact of an investment, for example). So if your marginal rate is 25 percent, your average rate is probably lower. Knowing this may lessen the sting a bit.
Don't forget about credits
Finally, there are a number of tax credits available for things such as child and dependent care, qualified adoption expenses or an electric car. If you qualify, have those documents handy, as well. You can subtract these credits from taxes you would otherwise owe.
Create a filing system to make next year even easier
Once you have a handle on this year's taxes, set up some simple files to keep on top of earnings, deduction and credits for the coming year. While doing taxes may never be your favorite pastime, with a little organization you can look forward to getting it done sooner rather than later.
It doesn't matter if you're doing them right (you're probably not). As a matter of fact, you should probably do them wrong. Make a mistake - preferably in their favor. Make it obvious. Force them to manually reconcile our return. File amendments. Reach back to earlier returns and amend them.
It is time to starve the beast and the best (legal) was is to Cloward-Piven them.
How can I make this process less painful? --A Reader
Drink - heavily.
LOL....a bit cheeky...
Yup
Why is the tax system so complicated? So that you will think that you got a benefit from the gov at my expense, and I will think that I got one over on you.
In reality we both got screwed.
To make it worse, no normal person can understand it and has to pay an accountant to do it.
I stick all the relevant paperwork into a folder all year, and generally try to do my return a month or so ahead, but I don’t file it right away.
For one thing, it’s a PITA to have to file an amended return because you get a last minute amended 1099 from someone. That’s especially true in a year like this one, when even the IRA doesn’t know what the hell the new rules are about.
I find it worthwhile to use TurboTax for my return.
LOL
“Right?” in the context of filing personal income taxes?
The tax code is so complex and sufficiently ambiguous that it has been said that giving the information for a person or couple with a moderately complicated tax situation to 150 “tax experts” will result in 150 different returns — all arguably “right” and equally all arguably “wrong”.
The point is to file a tax return that is defensible as being an honest presentation of your income and deductions within the apparent meaning of the tax code. Any more rigorous notion of “right” does not exist.
It’s complicated because the people who wrote it are mostly lawyers and have a guild interest in making creating demand for lawyers.
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