More than 60 percent of Americans are stressed about money, according to a survey from the American Psychological Association. And as spring approaches, the oft-cited stress of tax season doesn’t help. The good news is you can alleviate some of that stress by staying in control of your finances and expenses throughout the year. One key way to be in control? Adjust your organizational habits to get a grip on both the mountain of paper and your work calendar. Here’s how to get started.
Get your documents together early.
Whether you’re baking a cake or doing your taxes, any process takes longer – and is more of a headache – if you’re stopping and starting to gather necessary elements. Before starting your tax return, first try to compile all the documents you need to complete it. If you’re paid as a full- or part-time employee, your employer should have sent you Form W-2 in the mail. If a company pays you as a contractor or freelancer, they should send you Form 1099-MISC. Both forms report how much money you earned while working for the company.
If you haven’t received either form, contact the company’s HR or billing department to request it. If a company paid you less than $600 as a freelancer during the year, they aren’t required to send you Form 1099-MISC. However, you are still required to report that money on your tax return.
After you receive the right income statements from all your employers or clients, track down any investment or other bank account documents you need. Log into the websites of your financial institutions and download the paperwork that relates to you. Don’t forget to locate proof of what you paid in student loan interest, mortgage interest, health insurance, and any other deductible expenses throughout the year including receipts for charitable contributions.
Self-employed? Keep an updated expense spreadsheet.
If you’re self-employed or paid as a freelancer, tracking your business expenses and revenue on a spreadsheet can help you stay organized throughout the year. Every time you purchase an item or service for your business, immediately add it to the spreadsheet and put the receipt in a safe spot so you can easily find it later. Keeping your records updated is an important step in making your tax preparation efforts as easy and seamless as possible.
The IRS requires taxpayers to keep “contemporaneous records” as a way to validate their deductions. Essentially, that means a log of expenses at the time you incur them, says Robert P. Russo, CPA, PC, based in New York, NY. A simple spreadsheet via Excel or Google Sheets works nicely to keep track of work expenses, like brokerage account fees, tax preparation fees, membership dues, business subscriptions, and other itemized deductions.
Update the spreadsheet at least once a month and set it to automatically calculate the total for each category of expenses (i.e. travel, supplies). This will make it easier for you to input those totals on your tax return. And if you need extra motivation to keep track of those expenses, know that every dollar counts toward reducing your tax bill. Even if you spend five dollars tipping a parking garage attendant where you parked for a business meeting, you can include that as an expense on your spreadsheet.
Hang onto your receipts, and keep a detailed calendar.
Many people don’t realize that you’re required to keep actual receipts of your business expenses — not just credit card statement charges — in case the IRS comes calling, says Russo. Why? Let’s say you purchased a piece of electronic equipment for your business at Best Buy, but you didn’t keep the receipt. If the IRS ends up auditing you, and you have no way of proving you purchased that specific piece of equipment, the IRS will not let you deduct the cost on your tax return.
What’s the best way to keep track of receipts? Any way that easily allows you to stay the most organized. If you prefer old-school hard copies of your receipts, you could keep one folder for credit card receipts and another for receipts for items purchased with cash. Should you prefer electronic receipts, always remember to immediately save them into a folder on your computer desktop. You can also scan or take pictures of hard copy receipts and save them on your computer if you’re worried about losing the physical copy.
Another option is to use a mobile app to help you keep track. That also allows you to cut down on paper. Expensify has the ability to track and report travel expenses, scan receipts, and create expense reports. It’s also entirely free to use. Shoeboxed is a low-cost mobile app that allows you to track mileage and scan and organize receipts. You can also categorize your expenses as reimbursable, deductible, or “I’m not sure.”
Whatever you decide to go with, don’t forget to denote each expense as well as why it’s related to your business. It’s also helpful to keep a detailed calendar when it comes to client meetings, networking events, and business lunches so you can remember where you might have incurred various expenses. It’s not unheard of for the IRS to ask to see someone’s calendar for proof of a meeting or event.
The TaxAct mobile app, TaxAct Express, can also help you quickly calculate the expenses from your receipts and add them to the appropriate form on your tax return. That takes the stress out of worrying you’re taking advantage of every tax deduction when you file.
Use pre-tax dollars to de-stress.
If you’ve got a Flexible Spending Account (FSA) or Health Savings Account (HSA), contributing to those accounts before the April 17 filing deadline will help reduce your tax liability and potentially any related stress you may feel in fear of a high tax bill.
The money you put into those accounts — which can be used for most health expenses — stretches further because it goes in tax-free. A key difference between the two, however, is that FSA dollars expire every year if not used by a certain date and HSA money can be rolled over each year or transferred from job to job. HSA dollars can even be used in retirement.
If your employer offers an HSA to you, it works just like a 401(k) account where your contribution is taken out of your paycheck on a pre-tax basis. Your employer can also add to the account. If you set up an HSA on your own or separate from your employer, you can claim your contributions as an “above the line” deduction on your tax return. Your taxable income is then reduced by the amount of your contribution. Ultimately, that helps to minimize your tax bill.
Source : TaxAct Blog