There’s no two ways about it. The U.S. tax code is complex. Even if you have an understanding of how the tax system works, there are seemingly endless specific provisions that affect some situations but not others. You may get a good idea of how the tax provisions will affect you this year, but due to changes in your circumstances or even changes in the tax code, your tax situation could be very different next year. It isn’t hard to see why tax season can be stressful. But there are ways to reduce the stress. Some ways can help this year. And the other tips can help you out for future years.
First figure out what specific part of tax season causes the most angst?
Fear that you don’t know what you don’t know
Given the size and complexity of the tax code, this is pretty common. If you don’t have the time to research tax provisions, it might be worth the expense of paying a professional tax preparer to complete and file your tax return. It might not be necessary to use a paid preparer every year. Consider having a professional prepare your taxes in years when you have a more complicated situation like a new business, buying and selling a home or vesting or exercising of stock options. Even in years when your situation isn’t all that unusual, having a professional prepare your taxes every few years might either give you peace of mind that you have been preparing your returns correctly, or it might turn up things that you need to do differently when you prepare your return. At least you’ll have either validation or guidance.
There’s the fear that you’re paying too much simply because you didn’t know that you were eligible to take certain deductions or credits. With the new Tax Cuts and Jobs Act (TCJA), many deductions that were available in years past are not available. However,some new or changed deductions and credits are available and apply to specific cases. For instance, some credits are only applicable if your income is below a threshold. In some instances, they phase out over a range of income and in other cases they simply stop at a specific income level. Again, this is an instance of where you might want to have a professional prepare your taxes to ensure that you are taking all of the deductions and credits that you’re entitled to.
Then there’s the fear that you didn’t know in time. This often comes up if you prepare your own tax return using one of the tax software packages. You may get to a section that says it’s time to look for deductions and credits. When it asks certain questions you may think “Why is it asking if I did that last year? I could have done that but I didn’t. Should I have done that?” Or, as you get near the end of preparing your tax return, the software may start telling you that you don’t qualify for a particular credit or deduction because you made too much money. On the one hand, this is good. You made too much money. On the other hand, there’s the fear that you may have just lost a large deduction or credit because you made just a few too many dollars last year. If you had known, you might have taken steps to avoid those few extra dollars or push them to next year. This is where planning comes in. You want to either be familiar with the portions of the tax code that are likely to affect your situation or work with someone who knows those areas of the tax code well. Then you want to take two or three opportunities during the year to see how you’re doing tax-wise. Check that you are withholding enough for federal and state taxes, see if you are nearing any thresholds for deductions or credits you planned to take, and then make necessary adjustments. If you work with a financial advisor or a CPA who includes tax planning in their service, they should be able to work with you to evaluate how you’re doing by the third quarter of the year. That should give you some time to make any necessary adjustments and spread them over the fourth quarter.
Fear that you might have a big bill
The U.S. tax system is a pay-as-you-go system. If you are employed by someone else and receive wages, federal and state taxes are withheld from your paycheck. If you are self-employed, you should be making quarterly estimated payments. If you don’t pay enough during the year either through withholding or estimated payments, then you will have a balance due when you file your tax return. If you were really off target you may even have a penalty due. If you paid more than you needed to during the year you can expect a refund when you file your tax return. Again, this is where some tax planning will help. Tax planning may help you reduce your tax bill as well as plan for your tax bill so that there aren’t any surprises. With good planning you should have a very good idea of what your tax liability will be for the year. Then it becomes a question of withholding enough or making appropriate estimated payments to meet that liability.
The sheer amount of time it takes
The time it takes to find everything depends on your organization system. Many documents are available online and may not even be mailed to you. In those cases, it is up to you to remember to log in to those financial portals and obtain your tax documents. You can look at last year’s tax return and note the documents you needed for that tax return. Remove any institutions from the list where you no longer had accounts, income or expenses for the tax year. Add institutions to the list if you opened new accounts, received income or paid tax deductible expenses to new people or institutions. Gathering the online documents as well as those that are delivered to you will likely be done over a period of weeks. Scan paper documents as they arrive. It is easier to search for a document digitally than it is to search stacks of paper. Check documents off your list as you gather them. During the year, as you open accounts or start relationships that have tax implications, add the new institutions to your list. Adding a calendar appointment for January 31 which details the list is a good way to ensure that you get a reminder at an appropriate time so you know to look for any missing documents.
If you are preparing your own tax return it can take some time to get through the process. Fortunately, most tax preparation software packages allow you to import most tax documents from your financial institutions. This is a real advantage when you’re dealing with an investment account that has many buy, sell and dividend transactions. You still have to double-check that the transactions were imported correctly, but double-checking takes less time than manually entering transactions. If you can’t import tax information and the necessary transactions from your financial institution, the cost of your time and the hassle involved should figure into the costs of doing business with that institution. If you are stuck with that institution for other reasons, the cost of your time to handle these transactions should factor into your decision as to whether it makes sense to have a paid professional prepare your tax return.
Fear of an audit
For most people, fear of an audit comes back to fear that you don’t know what you don’t know. People do make honest mistakes on their tax returns. And there have been horror stories in the news about tax penalties involving large sums of money. The combination of those two possibilities leaves some people paralyzed. You still have to file your tax return. Again, this is an area where the peace of mind that comes from having a professional prepare your taxes, even if only every few years, could be priceless.
It’s important to remember that in filing your tax return, you are reporting on what already happened. There are some cases where you can determine how to handle a situation at tax time. But, for the most part, the time to take appropriate steps to correctly set up transactions and make decisions regarding income and expenses is during the tax year. This means that planning is important and may really help reduce your taxes in the long run. Planning gives you the chance to be proactive rather than reactive. And you may find that you have far more options when you are being proactive and endure much less stress at tax time.