Top Tips to Prepare for Tax Season
It’s here again, the most wonderful time of the year – tax season. Uncle Sam is the reason for the season, and the IRS is ready to give everyone a nice tax bill. Fortunately for you, we have the top tax tips, so you don’t end up with an excessive bill.
Shield Your Personal Information
You can get an Identity Protection (IP) PIN from the IRS to help protect your identity. An IP PIN is a six-digit number that helps prevent fraudulent use of your Social Security number on federal income tax returns. The IP PIN itself changes every year, and you’ll receive notification in the mail of your new PIN every year.
You can learn more about IP PINs here at the IRS’s website: https://www.irs.gov/individuals/get-an-identity-protection-pin
Keep Your Check in Check
Are you getting a huge refund, or none at all? If you are at either extreme, then it’s high time you look at your withholdings and consider changes. You’ll need to get a new Form W-4 from your employer and complete it to make the changes. Remember that tax withholding is a lot like porridge – best served just right. Withhold too much, and you’re essentially giving the government an interest-free loan. Withhold too little, and you’ll end up not only owing money but potentially interest and perhaps even penalties.
Maximize Retirement Plans
Are you offered a retirement plan where you work? If so, a smart tax step is to do whatever you can to maximum your contributions, especially if your employer matches your contribution. Not only are you giving up free money through the matched contributions, but you are missing out on the opportunity to build a tax-deferred nest egg.
Are You a Globetrotter?
Do you have a foreign bank account anywhere outside the United States? Did you have more than $10,000 in that account at any point in time, not just at the end of the year?
If you answered yes to both of these, then make sure you file what accountants colloquially refer to as an FBAR – or a foreign bank account reporting form. The new name for this form is FinCEN Report 114.
It can get even more detailed from here. If you and your spouse held “specified foreign assets” of more than $100,000 on the last day of the tax year or more than $150,000 at any time during the year, then you’ll also need to file a Form 8937, Statement of Specified Foreign Financial Assets.
There is a slew of other foreign account reporting requirements – for example, if you own an interest in a foreign business or are the beneficiary of a foreign trust. The penalties for noncompliance with foreign asset and account reporting can be high and repercussions severe.
Clean Out the Closet
There’s a good chance you donated some old clothing, furniture or household items to charity. After all, noncash charitable donations are one of the most common deductions people take on Schedule A. Unfortunately, they are also one of the most abused – and the IRS knows it.
Whether it’s because you moved or just wanted to declutter and simplify your life, the key is keeping good records. Deductions for donated items are limited to their fair market value and they must be in good condition; you don’t get a deduction for junk. The organization to which you donate should give you a receipt to prove your donation, but it also is a good idea to keep an itemized list of what you donated and even take pictures of the items, especially if the value is substantial.
Another tip: The IRS tends to scrutinize extra-large deductions. In other words, be careful when you claim a noncash charitable deduction that is a lot bigger than most people in similar situations. You can check out the IRS’s published statistics on Taxpayers with Noncash Charitable Contributions here: https://www.irs.gov/uac/soi-tax-stats-individual-statistical-tables-by-size-of-adjusted-gross-income
Keep these tips in mind to make tax season less taxing when you file. Remember, working with your accountant is the best way to minimize taxes and make sure you don’t pay a penny more than you should.