Are You Overpaying the IRS?

Today's tip is part of our Fiscal Fitness '09 series. Every weekday this month, you'll get help getting fiscally fit as we work toward our goal of saving $2,000 to invest in 3 stocks!

Feeling generous toward the IRS? Maybe you don't intend to, but according to the General Accounting Office, every year the average taxpayer overpays their tax tab by hundreds of dollars.

Presumably you don't mean to leave money on the table. (It's not like you're getting a handwritten thank-you note from Uncle Sam.) But that's exactly what happens when you overlook opportunities to take deductions and claim all the credits you're due.

Keep your largesse in check
On Jan. 7, we offered advice about adjusting your withholding to get your tax refund with each paycheck, instead of in one lump sum after you file your return. (Why let your money languish for 12 months without earning even a penny in interest?)

Today we're going to eke out more from the IRS by organizing all that tax-time detritus so that no potential deduction, credit or item to itemize goes overlooked. All it requires is a few office supplies and some simple guidelines for dealing with your tax-related paperwork.

Three files to make it EZ to file your 1040
The solution to dealing with each piece of tax-related paperwork is to have a place to put it so you won't forget that it exists. ("That pile over there with the other stuff I should go through" has been proven to be an ineffective organizational tool.)

Here's the three-folder system in a nutshell. For more details, see "Get Organized for the IRS."

Folder 1: Income-related paperwork. Anything to do with earned income goes here. That includes stuff related to your salary, dividends, earnings, distributions and interest payments. The "official" documents include W-2s and 1099s.

Folder 2: Expenses and deductions. If you itemize, then this will likely be your fattest file, since it will include all proof of those things you're planning to write off, including receipts, bills (e.g. utility, medical, business), canceled checks, etc. Note: Everyone gets a standard deduction, but if you own a home or have had a year of high medical bills, for example, it's worthwhile to look into both tax scenarios -- one with the standard deduction and one where you itemize. Be sure to do so with both your state and federal returns, since it might be beneficial to claim the standard on one but itemize on the other.

Folder 3: Investments. Purchases, losses, interest, dividends, sales -- all stock-related activity -- generates corresponding records that you may need before you file. This can get complicated, since most people have deductible/tax-deferred investments, nondeductible investments, and maybe even taxable investments.

For instance, depending on the particular stock you own, your dividends may or may not qualify for a 15% maximum rate, assuming you meet the other requirements to take advantage of those rates. Here are some examples below:

Stock

Eligible for 15% Rate?

Why/Why Not?

Merck (NYSE: MRK  )

Yes

 

Coca-Cola (NYSE: KO  )

Yes

 

Arcelor Mittal (NYSE: MT  )

Yes

Foreign stock, but listed on U.S. exchange.

SPDR Trust (AMEX: SPY  )

Yes

ETF owns stocks that are eligible.

Vornado Realty Trust (NYSE: VNO  )

No*

Not all REIT income is eligible for qualified dividend treatment.

iShares Barclays TIPS Fund (NYSE: TIP  )

No

ETF income that comes from bonds usually doesn't qualify.

San Juan Basin Royalty Trust (NYSE: SJT  )

No

Royalty trust income typically doesn't meet qualified dividend guidelines.

*Part of income may be eligible.

See the "Investors & Taxes" area of our tax center for more guidance.

For a rundown of the most common documents related to each of these categories, see "Prepare to Prepare."

A high-tech way to get organized
Fool glawlerx2 offers an excellent way to get organized in the digital age:

Most banks, for the most part, now offer your statements/1099s in digital format. For the rest of your paper documents purchase a scanner that can scan your documents to a PDF file. This way you'll have a easy way of organizing all your files... I burn each year to a CD and label the CD Taxes "Year" (i.e. Taxes 2008) and start the folders over clean. Note: Keep the paper for back up.

Got any time- and money-saving tax tips you'd like to share? Please chime in on the Fiscal Fitness '09 discussion board. And be sure to check out the thread about filling out returns -- on your own, with software, or with the help of a pro.

Stay tuned all week to get our top stocks
If you've been with us since the beginning of this series, you've come a long way, Fool. And if you're a latecomer, no problem! Catch up at your leisure with the following links to our weekly roundups. Our initial week was all about tracking spending money. Then we moved right into ways to whittle down those big-ticket, infrequent bills. Last week, we sweated some of the small stuff and found nearly $500 in savings to kick back into our wallets. And this week, we're working through the major financial categories -- savings, investing, and, of course, today's tip about keeping your IRS tab under control.

This Friday, Jan. 30, we'll celebrate your well-earned savings with three stock picks from our market-beating subscription-only investment services. So stay tuned.

More ways to save...

  • Don't miss the chance to take these deductions: Roy Lewis (TMFTaxes) runs down a list of six oft-overlooked deductions that even tax pros forget about. They include educator expenses, tuition and fees deductions, retirement savings contribution credits, and charitable/medical travel costs. See if you're missing any of these hidden tax deductions.
  • Are you eligible for free tax prep help and filing? Services like the Volunteer Income Tax Assistance Program and Tax Counseling for the Elderly help give great advice during tax season.

Read the latest from Fiscal Fitness '09: 1 Month, 2 Grand, 3 Stocks to get our other money-saving tips. You can also keep up with our tips through our daily Foolwatch email. Share your frugal insights and experiences through our Fiscal Fitness '09 discussion board, or leave a comment below.

Fiscal Fitness boot camp instructor Dayana Yochim owns none of the companies mentioned in this article. Coca-Cola is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


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