It's finally here -- that most exciting time of the year! We giggle like schoolgirls watching the letter carrier approach our home, hoping to find 1099 and W-2 forms nestled in our mail. We find it hard to concentrate on our jobs as we daydream about deductions and credits. We miss our stop on the train ride home from work because we're so engrossed by IRS Publication 514, "Foreign Tax Credit for Individuals." That's right -- it's tax season!
OK, you're probably not that excited about tax season. Still, it's not something we can ignore. Like it or not, most of us are stuck dealing with taxes once a year. In the hope of making your tax season and the coming tax year a little less painful, I hereby offer a few tips.
1. Be neat! It might be hard to write legibly after hours and hours of staring at barely comprehensible forms and filling in boxes, but don't succumb to sloppiness. The authors of What the IRS Doesn't Want You to Know state that "neat returns, especially computerized ones, are less likely to be audited than handwritten or sloppy ones. Even the IRS has gone on record stating that computerized returns are preferable...."
2. Avoid getting a large tax refund. It means you're lending money, interest-free, to Uncle Sam. Plus, you're missing out on the opportunity to invest that money earlier in the year, thereby having more time to grow. There's also a chance that unusually large refunds could draw the attention of some IRS auditors. So consider revisiting a W-4 form and revising your withholding so that it more accurately reflects your expected taxes.
3. Don't put off your taxes if you can't pay the bill. It's better to pay what you can when your bill is due. Otherwise, you're subject to penalties (plus accrued interest) for "failure to pay."
4. Sell stock smartly. When you sell some stock, you may be able to control, to some degree, the size of your taxable capital gain. This is true if you bought shares of the stock over a period of time, at different prices, and if you sell only some of the shares at one time. In such a situation, you can "specify" which shares you sold. If you bought 100 shares of Hasbro
5. Donate stock to charities. Imagine that you own 100 shares of Home Depot
6. Deduct the cost of your job search. If you, like many people these days, have been hunting for a job, you might be able to deduct some of the expenses you've incurred. This applies only to folks looking for a job in their current line of work, not those seeking a career change. Expenses for jobs you don't get still count, though, and these deductions are generally added to others on Schedule A and are subject to a 2%-of-adjusted-gross-income (AGI) floor.
7. Don't be a criminal. Here are some ways that you could be getting yourself in trouble: understating income, concealing accounts at a financial institution, using false names on accounts, counting personal expenses as business expenses, and failing to file a return.
8. Get rid of worthless stock. You simply need to close out your position in the holding, which you can do by selling it to a relative for a penny. Learn more in this article by TMF Taxes.
9. Contribute to an IRA. You have until April 15, 2004, to make a 2003 contribution to an Individual Retirement Account. Contributing to a deductible traditional IRA is one of the few ways you can still lower your 2003 taxable income. However, not everyone is eligible -- but contributing to a Roth IRA or non-deductible traditional IRA still has excellent tax benefits. Visit our IRA Center for more info.
10. Audit-proof your return. The authors of What the IRS Doesn't Want You to Know explain that tax auditors don't have it easy. They're typically trying to keep up with the latest tax laws, while simultaneously investigating returns that are several years old. For those returns, they need to refer to the rules in place several years ago. So their heads must be hurting. To combat all this complexity, they often simply rely on a few tried-and-true tactics when auditing, such as trying to match incomes reported by payers and the taxpayer, or looking for suspicious travel and entertainment deductions. So make sure you avoid such red flags. (Here are some more tips on audit-proofing your return.)
Longtime Fool contributor Selena Maranjian has found that the world of taxes isn't quite as excruciatingly boring as she once thought. It's actually mildly interesting. For more about Selena, view her bio and her profile . You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.