At over 74,000 pages long, the tax code is unquestionably complicated and complex. In fact, an estimated 17% of filers violate the tax code in some shape or form on their returns (though, thankfully, the IRS chalks much of this up to honest mistakes, as opposed to criminal activity).
While doing your taxes is by no means enjoyable (unless you're a true tax nerd and live for that sort of thing), knowing certain basics can help make the process far less aggravating and stressful. With that in mind, here are five key rules to follow.
1. Always report all of your income
Statistically speaking, your chances of getting audited are pretty low. Less than 1% of tax returns are audited each year, and it's usually really high or really low earners who are the most likely to get picked. That said, a good way to secure a spot on the IRS audit list is to neglect to report your income, whether intentionally or not.
Now if you're a salaried employee with no outside earnings, reporting your income is a simple matter of copying over a number from your W-2. But if you're a freelance worker or have money coming in from a variety of sources, such as interest or dividends, it gets a touch more complicated. At that point, you'll need to make a list of your different income streams and look out for 1099 forms summarizing each one.
Though you can technically file your tax return without 1099s, it's best to have those forms on hand as a reference. The reason? For every form that's issued to you, the IRS gets a copy as well, so if you list an amount lower than what the IRS is seeing, it could spell trouble. Along these lines, don't make the mistake of thinking you can hide your side income, minimal as it may be. If the IRS finds out you've intentionally underpaid your taxes, you could face serious consequences.
2. When in doubt, don't guess
The IRS offers a number of valuable deductions that could put serious money back in your pocket when you file your return. But guessing at those deductions is never a good idea, because if the IRS decides to do some digging and finds out you've fudged those numbers, it could come after you with a host of penalties.
If you're planning to itemize your deductions, be sure to keep detailed, accurate records all year long. Track all of your business expenses, keep tabs on medical costs, and, if you're a homeowner, retain copies of your property tax bills and mortgage statements so you know how much interest to claim. There's nothing wrong with taking deductions, but make sure the numbers you put down are 100% legit.
3. Keep old records and returns for at least three years
Tempting as it may be to purge your filing cabinet and free up precious office space, don't be too quick to toss out old tax documents and records. The IRS has up to three years to audit a previously filed return, and if it decides to question an old one of yours, "I threw out that information" is hardly a valid defense. If you're desperate to declutter, scan your tax records and store them electronically, whether online or on a flash drive (ideally, you should do both).
Keep in mind that the three-year statute of limitations works both ways. If you come to discover an error on a previously filed return that works out in your favor, you have up to three years to request a refund -- but you'll need your tax records on hand to prove it.
4. Don't aim for a refund
The majority of tax filers receive a refund each year, and while you might think that's something to celebrate, the opposite is actually true. Anytime you get a tax refund, it means you've loaned the IRS a portion of your income without getting anything in return. And why would you want to do that?
Ideally, your goal in paying during the year should be to break even. Though things rarely work out that way, if you play around with your withholdings and estimated taxes, you can get pretty close. But don't make the mistake of overpaying your taxes because you're afraid of owing the IRS down the line. If you're really concerned about decreasing the amount of tax taken out of each paycheck, rather than spend that extra cash, stick it in a savings account and let it accrue interest over the year. If, come tax time, you find that you owe the IRS some money, you can dip into that fund to pay your bill. And if there's anything left over, it's yours to keep.
5. Don't wait till the last minute
It's natural to procrastinate when you're dealing with taxes, but if you don't leave yourself enough time to tackle that return, you're more likely to make a mistake. And that's a problem, because if your return contains errors, it will likely get audited or rejected (in which case any refund you're due will take even longer to arrive).
If you really need more time to file your taxes, rather than rush through the process, request a tax extension, which will buy you an extra six months to get your paperwork in order. Keep in mind, however, that if you owe money on your taxes, an extension won't give you additional time to pay your bill; you'll still begin incurring interest the moment the tax filing deadline passes. If you're convinced you underpaid your taxes but aren't sure by how much, do a rough estimate and start making payments until you have an exact figure to work with.
Filing a tax return doesn't have to be a harrowing process. Stick to these rules and you'll conquer that tax return with your sanity intact.
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