Taxes are due soon! Paula Pant offers tips to get everything organized for Uncle Sam.
Good news! You have an extra three days to file taxes this year.
Because April 15 falls on Emancipation Day this year, a legal holiday in the District of Columbia, and the weekend follows—your taxes won’t be due until April 18.
This delay in the due date is great, but I’m (hopefully!) still going to file early—it makes tax time much smoother and I know I’ll have plenty of time to catch any mistakes or oversights.
If you’re also getting ahead of the tax game, in addition to filling out tax forms early, you should embrace the months leading up to April 18 as an opportunity to make a few savvy moves that could potentially lower your tax bill.
1. Submit Your Paperwork Early
The earlier you get started, the more time you’ll have to make sure all your financial ducks are in a row (and catch any missing paperwork or errors with enough time to rectify the situation).
My taxes are so complex now that I hired a Certified Public Accountant (CPA) a few years ago. I will make sure my CPA has my paperwork as early as possible. Giving him ample time may help him track down any opportunities from the year before that I still qualify for.
I prefer to show my CPA everything. I invite him into my business books (I’m self-employed) so he can see the bookkeeping software directly. I create Dropbox folders labeled with different types of forms (like 1099-INT, 1099-MISC, and more) and separate everything by form.
I know my CPA appreciates this. He told me that he’d rather have too much information than realize he’s missing critical information.
Here are some of the documents that I organize by section for easy access and review:
- Prior-year tax returnAny/all tax notices sent by the IRSForm 1099-MISC for freelance income
- Form 1099-INT and 1099-D for earnings on interest and dividends, etc.
- Other investment transaction records (e.g., brokerage statements from stocks and bonds, etc.)
- Information supporting my Schedule C and Schedule K-1 forms, because I run businesses and perform freelancing services
- Real estate transaction paperwork
- Forms 1098 for mortgage interest and property tax statements
- All my other financial record-keeping, including checkbooks and receipts
I also give him access to to my bookkeeping software.
I don’t have a W-2 form, but if I did, I’d send him that, too. Before I hired a CPA, I used to file my own taxes with TurboTax. That worked well when I just had freelance income, but I decided to upgrade to a CPA after I began investing in real estate.
2. Make Retroactive Contributions
A few weeks ago, one of my friends called me to ask for help.
She told me that she didn’t max out her Roth IRA or her son’s 529 college savings account.
She received a bonus at work around the holidays, so she had some spare money.
Even though 2015 is technically over, I told her, she could make retroactive contributions to her Roth IRA and 529 plan. If she had asked about a Traditional IRA, 401k, or HSA, I would have said the same thing: She could attribute it as a contribution for the prior tax year.
In other words, the IRS lets you wind back the clock.
Thankfully, she followed my advice.
She used part of her holiday bonus to max out her Roth IRA. When she made the contribution, she indicated that the contribution should be attributed to 2015, instead of this year. Of course, she did this well ahead of the April 18 deadline.
Now she can focus on maxing out her accounts this year.
3. Remove Excess Contributions
Okay, confession time: A few years ago, I mistakenly thought that I could contribute $5,000 to both a Traditional IRA and also a Roth IRA. (This happened before the contribution limit was raised to $5,500.)
I maxed out both accounts…and then realized I wasn’t allowed to do that. You can only contribute up to the maximum as a combined total between both accounts.
In other words, I accidentally contributed too much money to my IRAs. I had to reverse the damage by processing a “removal of excess contributions.”
If I didn’t make any “removal of excess contributions,” I would have paid a 6 percent tax penalty on the extra money, plus the interest it accrued.
I could have removed half the balance from each account, or perhaps I could have removed $4,000 from one and $1,000 in the other. I could pick any combination I prefer, as long as the combined contribution to both accounts did not exceed the annual maximum.
I chose to remove the entire balance from one account (the Traditional IRA), but that’s just my own personal choice.
Warning: I couldn’t just transfer funds out of the account. I needed to file paperwork with my brokerage and let them handle the transaction. I called my broker (Schwab) and explained the situation. They walked me through it.
I’m sometimes a procrastinator, but I made sure that I handled this several weeks before the tax-filing deadline. I didn’t want to risk getting hit with any penalties!
Use the lead up to tax time to your benefit: To err is human, and to err on taxes is especially human. Don’t fret over financial mistakes while you still have time to fix them.
Use these last three months before tax day to get organized, talk to your CPA, and correct any filing mistakes you may have made. Tax day will go much smoother if you do the footwork now instead of over the April 16-17 weekend. Feel free to learn from my mistakes…
Paula Pant quit her 9-to-5 job, traveled to 33 countries,
launched a business she runs from her laptop,
and uses the profits to invest in real estate.
She shares details about these adventures
and more on her website, Afford Anything.
The information contained in this article is not intended as legal, tax, or investment advice and is provided for informational purposes only, and may not apply or be useful to your specific financial situation.