Don't make your annual income tax filing a last-ditch effort to beat the clock. Scrambling to file your tax return can result in unneeded stress and costly mistakes. The last thing you want is to receive a letter from the IRS notifying you that, after readjustments, your tax liability is more than initially computed.
But filing your taxes doesn't have to be dreadful. Thanks to online tax tools, you can save literal hours on filing your taxes.
Tips To File Your Taxes the Right Way
Use Tax Software
You can use tax applications to prevent errors and losses that could result from many back-and-forths with the IRS and your state's fiscal authorities. Check out the best online tax service software before deciding which one to use.
When selecting a software provider, pay attention to things like accuracy, ease of use, and help and support. Other factors to consider include pricing, disbursement options – meaning how you receive your refund or pay your fiscal liability – and tax situations supported, namely 1099 income, homeowners, simple and complex federal tax returns, business filings and stock investors.
Hire a Fiscal Specialist
If everything tax-related is not your strong suit, enlist the help of someone versed in the subtleties of IRS stipulations. Various professionals can help you navigate the intricacies of tax legislation, including enrolled agents, tax accountants, fiscal attorneys and certified public accountants.
Go to your local chamber of commerce and get a list of reputable accounting and law firms specializing in taxation. You also can contact the American Institute of Certified Public Accountants, which maintains a comprehensive online resource on taxation as well as a directory of states' CPA societies.
Heed the Concept of Tax Basis
"Tax basis" means the value the cost of an asset, specifically the value that is fiscally ascribed to the resource. When taxation specialists talk about your assets, they refer to everything you own, including money in a bank account or stashed under the mattress, investments like stocks and bonds, and your mortgage-free house.
Depending on the asset, the procedures to calculate the tax basis can vary. Note also that tax basis is distinct from financial basis because tax accounting follows a set of rules that often are dissimilar to financial accounting standards.
Things can get a bit complicated when it comes to figuring out the tax basis of specific types of investments, such as mutual funds or corporate shares. Various rules apply to different scenarios, and I have tried to sum them up below. The whole idea is to accurately determine the tax basis of investments you sold so that you can properly calculate your gain – or loss if the sale price is lower than the tax basis.
Mutual fund transactions – You can use four different methods to calculate the tax basis of mutual fund shares you've purchased.
- Average basis single-category: Take the total value of your investment and divide it by the number of shares.
- Average basis double-category: Use the same approach as in the average basis single-category, but divide your total investment value by the total number of shares, depending on how long you've held the shares.
- FIFO (first in/first out): Use the tax basis of the shares you've bought first as the per-share value of the first batch, applying the same approach for the second and third and fourth batches – and so on. For example, say you bought 10 shares at $10 apiece, 20 shares at $15 apiece, and 10 shares at $20 apiece. If you sold 20 shares, the unit cost (or per-share tax basis) equals 10 shares multiplied by $10 plus 10 shares multiplied by $15, that sum divided by 20. The resulting tax basis equals $12.5.
- Specific identification: Use the price ascribed to the specific shares you sold.
Stock value during a divorce – If you receive corporate stock during a divorce, use the same unit value your former spouse assigned to the stock.
Bequeathed shares – If you received stock as gift take the lower of the stock's value at the time you got the shares or the stock's initial price (meaning when the original owner bought them).
Inherited stock – Use the fair market value of the shares on the day your benefactor died.
Top 9 Tax Errors That Cost You Money
Following specific techniques and doing your fiscal homework in advance can help you avoid tax errors that could cost you money.
1. Paying Your Tax Bill with a Credit Card
Don't use your credit card to settle your tax bill – never. Even if you had a zero percent APR offer, you could end up paying more if you don't remit the full amount charged to the credit card company before the introductory period expires –say one year or 18 months. And we all know that your annual percentage rate would go up, sometimes drastically, after the introductory period, and you could be stuck with a sizable loan amount at a high interest rate.
If you're having problems paying your tax bill, it often is better to find an agreement with the IRS, whose interest rates, albeit high, are not as exorbitant as rates proposed by some credit card companies.
2. Falling Prey to Identity Theft
Pay no mind to those emails that (rightfully) landed in your junk folder but look so professional, you feel tempted to give them more credibility that they really deserve. Discard that email you read one Saturday morning, in which someone somewhere was seeking your financial help to claim a tax refund that allegedly is worth millions of dollars.
Besides ignoring bogus emails and other written correspondence or phone calls, talking to the right people also is important. Report ID theft events to the IRS or law enforcement as soon as possible, and follow authorities' instructions to the letter.
3. Not Disclosing a Foreign Account
Hiding a foreign account, with the implicit purpose of concealing income, is a crime. Don't let anyone coax you into opening an offshore account to hide assets from the government, as you could face big trouble if authorities find out and initiate litigation.
Not disclosing a foreign account falls within the scope of tax evasion, which is a felony, unlike tax avoidance, which seeks to minimize your taxes while complying with the law.
4. Not Filing
File your tax return even if you earned no income during the previous year or your earnings fell below the filing requirement. It would cost you nothing to file, especially if you do it online, but you could always grab a few dollars here and there from the government by way of tax credits. That way, you keep your records up-to-date with the government. Some organizations – think lenders, insurance companies, property management institutions as well as state and local unemployment agencies – also ask for tax returns for the previous two or three years when studying applications for things as diverse as credit, insurance and tenancy.
Some organizations – think lenders, insurance companies, property management institutions as well as state and local unemployment agencies – also ask for tax returns for the previous two or three years when studying applications for things as diverse as credit, insurance, and tenancy.
5. Ignoring IRS Mail
Not opening IRS mail, or filing it in the most hidden places in your house, would not make the letter's content go away. So summon up the courage to open that letter, read the (supposedly dreadful) content, and try to make sense of it. Contact your tax accountant or attorney if you don't understand information in the letter or legalese the IRS has used. Knowing early on what the IRS wants from you can be a money saver, especially if the agency decides to penalize you and start charging, say, 1% per day until it hears from you.
Contact your tax accountant or attorney if you don't understand information in the letter or 'legalese' the IRS has used. Knowing early on what the IRS wants from you can be a money saver, especially if the agency decides to penalize you and start charging, say, 1% per day until it hears from you.
6. Filing a Fake Joint Return
If you file a joint tax return with a tax cheat, you could be liable if the IRS finds out and initiates a legal action. It is against the law to knowingly file a false tax return or to associate yourself with an enterprise that aims to defraud the government.
So, the bottom line is: don't do it. And if you do it unknowingly, contact the IRS and your state's tax authorities right away. You can also reach out to your tax accountant to amend the fiscal return and fix whatever inaccuracies were inputted on the initial return.
7. Not Applying for the Earned Income Tax Credit
If you are in the lower to middle side on the income spectrum, filing the Earned Income Tax Credit can bring some cash into your coffers, making you laugh all the way to the bank. If you have low income, the credit lowers your tax bill by an amount ranging from $3,000 to $5,000 – and that applies even if you use one of the simpler tax forms, such as Form 1040-EZ.
8. Failing to Deduct Employment Search Expense
Note that you can deduct money spent on job searches – that is, everything from resume copying and postage to gas and parking fees paid while driving to and fro prospective employers' locales.
If you were unemployed at any point during the previous year, or still are jobless, be methodical and deduct all job search costs to reduce your overall tax bill and fatten your refund check.
9. Applying for a Refund Anticipation Loan
Stay away from refund anticipation loans, most – if not all – of which generally constitute a rip-off, says Elisa G., a certified financial planner who for years has studied personal finance and the effects of tax refund on individuals' savings levels. A typical refund anticipation loan can charge as much as 30% interest, and what you may not know is that the fast refund doesn't come from the IRS but is money the tax-preparing company advanced to you.
Unless you face excruciating financial circumstances and cannot wait for two or three weeks until the IRS sends you your refund, or don't have any relative or friend who can lend you some cash for up to 21 days, I would say go ahead and apply for a refund anticipation loan.
How to File Taxes Online Recap
Tax software can radically reduce the amount of time and energy it takes to file, and many online versions offer free and affordable options for no matter your understanding of the Tax Code. Following the clear, simple steps outlined in this article can make tax season a breeze. Avoid the common mistakes others make, and file your taxes the right way the first time.
Are you having issues with the IRS? The best tax debt relief companies can assist you with managing back taxes you owe and settle your debt.