It’s Almost Tax Time!

With the New Year, it’s time to begin to sort out taxes.

W-2s will be in the mail soon, and time is rapidly running out for you to make contributions to retirement accounts.  If, like many folks, you’re ready to go ahead and get your taxes filed, let me make a few suggestions BEFORE we sit down to file…

First things first:  remember, you have to claim ALL your income, so if 2020 saw your branching out into various “gigs” like delivery driving, maybe some “cash and carry” work, or contracting, you’re legally required to document that and pay taxes on it.  At the same time, a lot of those jobs don’t take out any taxes on your earnings.

That means you’re responsible for it. 

Now, some companies will send you a 1099 for it, but, in my experience, a lot of them conveniently “forget” to do so. 

You need to make notes on that income and make sure you have it documented before you file, because not doing so can result in a “surprise” tax bill when you least expect it. 

Next – and we already touched on this a bit – if you haven’t maxed out your retirement account contributions, you need to do that prior to filing.  This isn’t just idle talk, either.  I’ve worked with many clients on tax prep that “rounded up” their 401(k) contributions at the end of the financial year to allow them to slide into a lower tax bracket.  In one case, the amount they contributed actually saved them nearly $1,000 due to the difference in their tax bills for the year. 

Besides, you’re putting this money into your retirement accounts, so you’re really “keeping” it. 

The last thing is probably the hardest. 

You need to get all your paperwork, receipts, and documentation together.  I know, many companies and financial institutions seem to take forever to send this material out to you, but filing your taxes isn’t about speed, it’s about whether or not you’ve gotten them filed correctly. 

Eventually, the IRS catches up with mistakes, and over the years, I’ve seen taxpayers get letters discussing shortcomings years after the fact.  Accuracy counts for a lot, and the only way to be accurate is to have all the date you need.  Even worse?  In some cases, the IRS can assess penalties and make those retroactive with interest to the tax year in question. 

Who wants to get hit with a tax bill three years later for $500?

Nobody, that’s who.

There’s one other part of this whole process I see very few families doing, and I’ve never really gotten a clear reason for it. 

Teaching your kids. 

Even your fifth grader probably understands the concepts of taxes, and by taking time each year to explain and share your own knowledge about income taxes and how they work – and the consequences of not following the laws – will help your kids to develop a healthy respect for money and budgeting.  You may not feel comfortable discussing your income with them, and I understand that – but sharing with them how deductions and write-offs work allows them to learn that, while we all have to pay taxes, the IRS allows us to spend less when we take certain actions. 

A car you use for business, for example. 

Your uniform allowance, or how you can deduct childcare expenses, and so on. 

They’re not going to learn this in school, sadly, and a piece of software, while useful, can only give them so many prompts to determine their tax bills. 

When you take the time to teach them, you’re helping them to think critically and maybe even inspiring them to become better money managers as they grow up. 

This time of year, of course we’re getting busier, but I’m always here if you have questions about your own returns.  As crazy as 2020 was, I have even opened up my calendar more to be available to anyone who is really puzzled about their next steps, too.

IMPORTANT: Our firm specializes in tax resolution. We serve clients virtually so don't hesitate to reach out.  If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm so we can schedule a confidential consultation to explain options to permanently resolve your tax problem.  Make an appointment here!  Or, call Toll-free 1-855-254-1892.