Tax season is less than three months away! I’m jumping for joy!! I know some of you aren’t. I used to feel your pain, but there are some steps you can implemented on a quarterly basis, or even half way through the year, to take the edge off. Here are my suggested steps preparing for next tax season:
1). Organize all important papers you received throughout the year into one stack, and shred anything that is not needed. Sort these documents by type and use paper clips, post-its, etc. to help distinguish each document type. Store the docs in a safe place, but that it accessible enough for you to add more when needed. Important papers are documents that support taxable income or anticipated deductions and, or credits. The IRS recommends that these items are kept in your files for 3 years. I would just say eternity, to be on the safe side! These documents include, but not are limited to, the following:
a. Credit card and Bank Statements (including cancelled checks)
b. Medical bills
c. Tuition receipts/statements and receipts related to educational expenses.
d. Mortgage/Home equity loan statements
e. Investment account statements (IRA, 401k, etc.)
f. Rental property schedules listing income and related expenses
g. Any documents to support small business transactions/purchases.
2. Check your exemptions for this year’s current withholding. This is the perfect time to check and see if you are “paid up” on your federal, state and local taxes. Some people don’t adjust their number of exemptions at the beginning of the year. I usually say people are too tired from the holidays to think about it. Here’s my annual tax mantra: “My life changes every year, my tax withholding should too”.
Use these nifty calculators to see if you are on the right track with your taxes. You will need your most recent paycheck stub and prior year’s tax return.
Federal Income Tax Calculator
State Income Tax Calculator
Exemption Calculator
Another way to gauge your tax withholding is to compare your adjusted gross income to this year’s year-to-date gross. If your current wages are roughly 75% of last year’s wage, you are on track for the same tax liability/refund. If the If you under paid, decrease your exemptions by at least one to mitigate any damages. If over paid, increase your by at least one to create some extra cash flow for the rest of the year. But if you are fine with giving the government an-interest free loan of your net pay, leave everything as it is.
3). Create a monthly budget, and stick to it! After you’ve figured out what your net pay should be, the next step is creating a budget based on your tax liability. There are various ways to create a budget, depending upon your financial goals. Below are two budget plans that are easy to digest.
The 50-30-20 budget allocates your net monthly income based on predetermined categories. The budget’s formula states that your net income should be spent as follows: 50% needs, 30% wants, and 20% savings. Use the calculator provided by MSN.com here .
Another budget mechanism is projecting all of your expenses for an entire year and dividing the amount by the number of time you get paid in one year. By doing this year, you can designated a dollar amount for bills and savings. Also, it is possible you can find surpluses of cash throughout the year. This is my own personal budget formula that I use. I use this method because I feel as though I have a more control over my spending habits and my cash flow. Plus, it suits my financial personality because I am a firm believer in direct deposit, e-banking, and automatic payments .Another useful link is Kiplinger’s Budget Worksheet. This can help with the yearly projections.
Happy Paper Trails!!