Yes, it’s that time again—time to man up and figure out how much the government is going to take away this year. Doing your tax returns is like going to the dentist (sorry, Mom)—you prepare for it all year, and in the end you don’t really want to do it, but if you ignore it for too long, things go south real fast.
Over the years, I’ve tried to share some of the lessons I learn annually about how to do taxes more efficiently and accurately. As a public service, here’s a quick recap of lessons learned in 2009:
- Figure out how your changing family situation (marriage, kids) affects your taxes.
- Free e-file might not really be free.
- If you e-file, save your work regularly.
- Keep immaculate records for ease of use at tax-time.
- Everyone else is not as concerned about your taxes as you are.
- Simplify, simplify, simplify.
- I’m not looking forward to filing business taxes.
Also, here are a few from 2010:
- File (or at least calculate) as soon as you can to see what you’ll owe or get.
- Keep your documents organized.
- Stay updated on the big tax law changes.
- Pick a tax system/software and try to stick with it.
Lessons from 2011
Just this past weekend, I had an opportunity to prepare 95% of this year’s tax return. It’s time to dig into my head for a third time and see what I’ve discovered for 2011:
Lesson #1: Have a rough idea of the damage.
If you’re following along with the plan and adjusting your W-4 on a regular basis, you should have some expectation of the refund or balance due at the end of the year before you actually do your taxes. If you do, I would guess you’re probably one of the 5% (complete guess) of American taxpayers who have any idea what’s in store for them when they file, which is a good place to be.
Case in point—when I started my tax paperwork this year and entered most of my information, TurboTax was telling me that I was going to owe over $1,000 to the IRS for unpaid taxes. After I got over the initial heart attack, I quickly realized that a key child credit was not being calculated correctly. The software had made an error, but thanks to my initial estimates, I knew I had to look for a way to fix a problem I knew existed.
Lesson #2: The best time to file is late February.
That’s not necessarily the case for everyone, but over 10 years of experience, I’ve found that this works best for me. If I start picking through my documents any earlier, or worse—get to entering them into Turbo Tax—I won’t have a complete picture of what’s going on and the whole process will take 12 hours when it should take 2.
On the other hand, if I wait too long past February to get my act together, I’ll either be passing up on a healthy influx of cash, or setting myself up to be blind sighted by a big amount owed.
Lesson #3: Getting out of paying taxes is designed to be hard.
I’m talking specifically about a few deductions I was able to go after for 2010 that were completely new to me—the HSA (health savings account) credit, and an educational expense credit.
While these credits are common to many taxpayers, figuring out what you are entitled to actually claim can be frustrating. I would estimate that 25% of my time doing my return was spent researching and correctly setting up these two credits. In the end, they were worth it, but this demonstrates that paying taxes is a lot easier than figuring out ways to pay less.
What Have YOU Learned This Year?
So that’s three things I learned from doing my taxes this year. Are you done with your returns? Is there anything you had to do differently this year? Are there any lessons you learned the hard way you could help us avoid? Share your thoughts!
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