Beating the Tax Time Blues

April 15 looms large on the calendar for a lot of people. It's a big topic on the news and radio shows a couple of days prior and another entree to chew over during lunch with co-workers. Are you getting a refund or do you owe this year? Are you doing your own taxes or having someone else do them for you? Is this deductible and is that a write-off? Is a credit better than a deduction? There's a ton of questions and the answers are often amusing, if incorrect, but sometimes they are just plain scary.

Avoiding the hassles is actually rather simple - you need to pay attention to your tax situation during the year and not leave everything to the last minute. By doing some things during the year, you can decrease your tax liability, increase your tax credits and deductions and make sure that your later years will be better funded.

Tactic #1 - Take a trial run at your tax return

The updated US Tax forms are available online starting in November for the upcoming tax filing season. Using your payroll stub from the end of October, you can figure out approximately what your end of year will look like. Take your year to date gross wages, divide by 10 (10 months that are already figured) and then multiply that number by 12 for a full year's wages. Do the same with the federal withholding to figure out what your year's withholding will be. Fill out the 1040 EZ, 1040A or 1040 using these two numbers in the appropriate places along with your usual number of exemptions and deductions. Check the tax table using your taxable income and see if your projected withholding is greater than your liability. If it's close, you are probably doing just fine, especially if you usually have a couple of credits. If you notice that you are not close, you can have more withheld for December and start putting aside money in January, February and March to save yourself from having to scrape together your payment.

Tactic #2 - Set up a filing system.

Sounds like a no brainer, but a simple Pendaflex is about $10 - $15 and you can use it to store all those papers that you are going to need at tax time. The shoe box is not your friend - I've done enough sorting of papers and receipts for clients to have witnessed how receipts tend to disappear. Each section of the Pendaflex is for a particular deduction, adjustment, income or credit. All those medical bills can go together, all the bank statements in a group, the paperwork from the insurance company from the flood claim, etc... At tax time, you pull out each set and work on just that group since all the sorting has been done for you. A bonus is that you can slide your completed tax forms in the front or back slot and have all paperwork organized in case you need to go back or an auditor has a question.

Tactic #3 - Get to know which parts of the tax form can put money in your pocket and make sure you are using them if you are able.

• Income is great and we all like having income, but income is what is going to be taxed.
• Adjustments are the lower part of the 1040 form and are things that you should be taking advantage of if you can. These are things that you've spent money on and they are pretty straight forward. There are some income limits on how much you can deduct here, but anything will help.
• Itemizing is often thought of as being the big tax write-offs, which some people take instead of the Standard Deduction. Take the time to read through Schedule A to see just what is able to be itemized as a deduction to see if it might benefit you. There are several areas that are subject to reductions, so read carefully.
• Lines 47 through 54 are non-refundable credits which will reduce your tax liability, maybe even to zero owed! Since these are non-refundable, you cannot get money back on these, but it wipes out your tax owed. Again, some of these get reduced or eliminated if your income is high, but many people could be getting at least one of these credits. Hint: Retirement Savings Contribution Credit.
• The Payments section (Lines 62 through 70) are credits that put money in your pocket. Your Federal withholding is the amount that gets entered on Line 62. It is tough to pick up these credits - usually you have one or more children, have a very small income or bought a home and are qualifying for the home buyer's credit.

Tactic #4 - Start an IRA or put more money into your IRA.

For every $50.00 that you can put into your standard IRA, you are saving yourself about $7.00 to $14.00 in taxes due, depending on your tax rate. Additionally, you might be able to build a non-refundable credit of up to $2,000.00 (from the 2008 tax code). If you waited until January or February, you can still make contributions to your IRA for the previous year until April 15th. So knowing that you owe money, you could eat it down by putting the money you would end up paying in taxes into your IRA, helping to build something for your later years.

Tactic #5 - Take that refund and use it to build an income source.

You've already paid taxes on it and won't pay taxes on it again, so use that refund to to make you money instead of just paying off a bill. Paying off debt that you plan on growing again is demoralizing at the very least and can be devastating if you suddenly don't have that refund. Sure, you'll pay tax on the money it earns, perhaps 25%, but you still get the remaining 75%. Use your already taxed money to build a financial safety net that will keep you from laying awake at nights when the car's engine need to be replaced or the hot water heater breaks down. Money that you have paid taxes on is seed money to build a better tomorrow and maybe a better today. One big note here: NEVER put your tax refund in a traditional IRA!!! You will pay taxes on it and all the money it earned when you take it out. After tax money should go into a Roth IRA which is non-taxable when you take it out. Even better, all the money it earns is also non-taxable. As with all IRAs, you need to make sure that you can withdraw the money without penalty, unless it is a dire emergency. Not buying a new couch emergency, but life sustaining emergency.

So there are 5 tactics to begin using to help take the pain and fear out of your 2009 tax season. Once you start taking your taxes in hand and getting them under control, you'll be sleeping a whole lot better.