Happy tax season! If you aren’t excited about doing your taxes, I don’t blame you. Filing your taxes can be stressful and confusing. If you’re not sure where to start, are losing sleep, or just want to minimize your tax bill, here are four tax tips that will make filing your taxes a breeze. And bonus: They might even save you some money!
Do Some Prep:
Whether you file your taxes yourself or hire an accountant to do it for you, you will want to do some prep. Have your social security number handy as well as the account and routing numbers of the bank where you wish to receive your refund. Why not make it easy for the IRS to pay you back?
Gather all of your income documentation, which may include a W-2 Wages and Tax Statement, 1099-MISC forms and any interest, dividends or gains and losses on investment, and savings accounts. Having this information ready will save you headaches and time when it’s time to file.
Know What Counts as Taxable Income:
Your taxable income is your total earnings that’s going to be taxed. This includes your income from wages such as your nine to five job or side hustle, income you earn from interest on savings, dividends i.e. payout from companies that you receive as an investor, and realized gains or losses.
What’s a realized gain or loss and why does it matter? When you lose money on an investment this is called a realized loss. It reduces your taxable income and therefore decreases your tax bill. When you make money on an investment, this called a realized gain. It increases your taxable income and therefore increases your tax bill. It’s all addition and subtraction. If you haven’t sold any investments, you haven’t realized any gains or losses.
Minimize Taxes Where Possible:
Now for the fun part! Let’s trim your tax bill.
One way to minimize your taxes is to hold onto an investment for over a year before selling it. If you buy and sell an investment in less than a year, you will be taxed at your ordinary income tax rate. If you buy or sell an investment a year or more after buying it, you will be taxed at the long-term capital gains rate which was 15 percent for 2015. This can save you big time!
Tax deductible expenses are another way to decrease your tax bill. A tax deduction is just a reduction of your taxable income due to qualified expenses.
Here are some items that are tax-deductible: Interest on your mortgage and real estate taxes, qualified donations, interest on student loans, and out of pocket medical expenses.
There are many more tax deductible expenses that may apply to you. If you are ever unsure, contact a tax professional or even do some online research to find more information. If you don’t take advantage of tax deductions, you may be overpaying in taxes!
Build Good Year-Round Tax Habits:
Waiting until the last minute to do your taxes causes stress and ends up taking more time. Do you remember what you spent in January of 2015? I know I don’t! Make it easier on yourself and create a system so that you are gathering information monthly or quarterly year-round.
Schedule a money meeting with yourself each month, track deductible expenses, and take photos of important receipts. Don’t be afraid to ask for help or use resources like a tax preparation checklist to help you track what you need.
Ashley Feinstein founded Knowing Your Worth where she works as a certified money coach. Ashley demystifies the world of money and personal finance for her clients whether they are creating a financial plan, negotiating compensation or paying down student loans. Her work has been featured on Real Simple, NBC News, Forbes, Yahoo Finance, DailyWorth and GoGirl Finance. Connect with Ashley on Twitter, Intagram and Facebook and visit her website to learn more.
Image via Classy Girls Wear Pearls.