For many, the chore of doing taxes starts in February, when forms and documents start trickling into the mailbox. Then there’s deciding whether to use tax software or hire a tax preparer, and of course the agony of sifting through paperwork and filling out forms. All told, according to the IRS, it takes between 5 and 15 hours on average to prepare an individual tax return.
There are many other things you’d probably rather do with that time, so here are a few ways to make life easier come spring.
Set up a folder just for tax stuff
When your W-2s, 1099s and other tax documents start rolling in, keep them together in one place so you have them when it’s time to do your taxes. Make sure receipts are in there too, to keep you from forgetting about months-old potentially deductible expenses. It could also save money: Tax preparers’ additional fees for dealing with disorganized or incomplete files average $117, according to the National Society of Accountants. Label and store the folder and its contents after you’re done with it. If you’re ever audited, you’ll have all your materials in one spot.
Know the tax impact of major life changes
If you got married, divorced, bought a house, had a child or lost a spouse or dependent during the tax year, your tax situation is probably going to change. Figure out what that means now, while you have time to offset any potential resulting tax increases.
For example, if you bought a house this year, it may be better to itemize rather than take the standard deduction. And if you’re going to itemize, start looking now for other deductions rather than waiting until April when you can’t remember anything and you just want it to be over.
Decide between software or an accountant
If you’re going to use tax-prep software, decide what features are important to you and whether you’ll need the basic, deluxe or premium version. That way, when software providers release their products for the new tax year, typically in December or January, you can take advantage of introductory price discounts. (If you do your homework now, you might even discover that you qualify for free tax software.) And if you plan to work with a tax preparer, get on his or her schedule now, before everyone else does.
Find the right tax software
- Don't pay for more than you need.
- Identify the features that will help.
- Make sure you'll be supported.
Figure out what you can do after Dec. 31
Most deductible expenses must occur before the end of the tax year, but an IRA contribution isn’t one of them. That means IRA contributions for 2016, for example, can be made until the April 2017 filing deadline. Decide now whether you’re going to take advantage of an IRA. You’ll have more time to make a bigger contribution instead of trying to scrape it together in the spring.
The average adult can correctly answer only about 50% of personal finance questions related to federal income tax returns, according to a 2015 NerdWallet survey. Don’t be on the wrong side of that 50%. If you don’t know what’s deductible or that simple changes could help your tax situation, you could be leaving a lot of money on the table.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: [email protected].