Tax Season is over (finally!) so you probably filed your tax return and received, and perhaps already spent, your refund or paid your tax due.
With all that out of the way, now is a good time to look back and see what you can learn from your 2010 Form 1040. Read on as we outline the three most common tax mistakes and provide some tips for how to make they sure you don't repeat them next year.
You owed too much to Uncle Sam or your state. Having a balance due at tax time isn't a bad thing, but there is a point where owing too much can result in an underpayment penalty. On the other hand, if you received a large refund, you made an interest free loan to the government.
In either case you should review your withholding status at work and increase or reduce the federal and/or state income tax withheld from your paycheck. This requires filing a new Form W-4 with your employer.
The IRS website has a “Withholding Calculator” that you may find helpful, or you can try the free “Form W-4 Assistant” tool at PayCheckCity.com. This site also has a “Salary Paycheck Calculator” which you can use to see how various changes in withholding will affect your take home pay.
Instead of changing your withholding you can also elect to make quarterly estimated tax payments. Download the 2011 Form 1040-ES from the IRS website; the state payment coupons and instructions are available on the website of your state’s Division or Department of Taxation or Revenue. You can use the Electronic Federal Tax Payment System (EFTPS) to schedule your estimated payments in advance.
Many taxpayers use over withholding as a form of “forced savings" since they know that if they get an additional $50 - $100 in each paycheck they will spend it. But they're better off reducing their withholding and having the amount of the reduction automatically transferred to or deposited into a credit union or bank savings account. This way their take home pay won't change.
You had a tough time getting your tax “stuff” together to prepare your return or prepare for your visit with your tax professional. Next year, take the time to set up a good system for maintaining tax records and receipts. The system can use hanging folders, an accordion file, manila envelopes or whatever else you like, but do make sure to keep good, contemporaneous records of all your income and deductions in the manner prescribed by the IRS and the Tax Code.
Also, be aware that some deductions require special recordkeeping or additional information, such as business meals and entertainment, business use of "listed property" (automobiles and computers), charitable donations and gambling losses. Ask your tax professional for help if you're confused.
You were baffled when preparing your return, or having it prepared, and felt you did not take advantage of all the deductions or credits to which you were entitled. Resolve to become more informed about federal and state tax laws. It is impossible to know the right moves to make in your daily financial life without a basic knowledge of the tax implications of your actions, so take the time to learn what items you can and cannot deduct, including the special items that are unique to your trade or profession and the rules governing any special situations that apply to you. And always keep up-to-date on federal and state tax law changes. Even if you use a tax professional to prepare your return, the more informed you are about tax matters, the more prepared you will be when you go to your annual tax appointment next year.
Stay up-to-date on federal taxes by paying a regular visit to MainStreet’s Tax Center.