Sunday, April 24, 2011

Taxes Are Done...Time to Get Ready for Next Year!

I can almost hear the groans...

"But Jenna, I just got done filing my taxes...and now you want to talk about next year?"

Just like thinking about having another drink might intensify that hangover headache you feel the morning after a wild party, the last thing you probably want to think about during your "tax hangover" (as LearnVest calls it) is taxes.

However, I think the most effective time to learn from mistakes is when that pain is fresh in your memory.  Doing some reflection now can help you start preparing to prevent that hangover next year.

Think about how you felt your tax process went this year.  Were there any areas that were particularly stressful or frustrating?  If so, now is the time to figure out how to make that less stressful next year and to start working towards that goal.

First, there's the organizational pain (or perhaps more accurately, lack-of-organization pain).  Although I'm currently working on my filing system now, it wasn't so spectacular (ok, maybe it was a small disaster) earlier this year.  As a result, I had to do some rummaging around to find documents, such as receipts from donations in the prior year.

How can I do this better next year?  As part of my new file system, I'm creating a "2011 Taxes" folder to keep documentation of all of my donations throughout this year.  Then, come tax time, all I have to do is pull out the folder and everything will be in one place.  The same concept would apply for any type of tax documentation you need to keep, such as receipts for work-related expenses, large medical bills, records of investment sales, etc.  If you feel that you need to keep a medical document with your other medical files and not with taxes, you could simply make a copy and keep the extra with the tax items for easy reference.  Or, if you don't like wasting numerous pieces of paper, you could keep a list of tax-related items in the tax folder that reference all of those bills you'll need and their location.  Just come up with something that works with your style and your system.

Second, there's the monetary aspect.  It's never fun finding out you owe taxes after filling out your return.  I've been lucky enough to have usually been on the receiving side thus far.  However, I still don't particularly like the idea of a large refund since it means I haven't been able to earn any interest on that money during the year, and I haven't had any choice with what to do with that extra money over the last 12 months.  I feel I can do better.

Unless you had a relatively small refund or payment, I'd recommend you give your W-4 withholding a check-up.  The IRS actually has a calculator you can use to help you determine if changing your withholding (up or down) would be beneficial.  (Tip: Make sure you have nearby access to your last tax return and your year-to-date pay'll need information from there to complete the calculator.)  Turns out it would be beneficial for me to increase my allowances by one to get a much smaller refund next year, so I went ahead and made that change with my HR department.

I know that my taxes are fairly straight-forward, so I'm sure this is barely the tip of the iceberg, but you get the idea!

Did you have a "tax hangover" this year?  If so, how do you plan to avoid tough situations for next year's taxes?

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