It’s time for end of year tax planning! Time to get your financial house in order for tax season! What could be more fun that taking a break from holiday festivities and shopping to start thinking about taxes?

It seems like every year when we do our taxes, there’s a few things we wish we would have done in December to reduce our tax bill just a little more. Sound familiar?

That’s where a little end of year tax planning results in great rewards!

Here’s an updated list of money moves to make before the new year.

Year End Tax Moves

  1. Run a preview. Before the end of the year run an estimate using the tax calculator or Turbo Tax. If you wait until the new year, it’s often too late to go back and make changes. Start running projections now before the year end!
  2. Bump up contributions to retirement plans. Contribute more to your 401k by the end of the year to reduce your taxable income and your tax bill.
  3. Plan for health insurance changes. The new penalty for no health insurance in 2014 and the Health Insurance Premium Tax Credit both apply for the first time this year. Here’s How to Claim the Health Insurance Premium Tax Credit on your tax return.
  4. Take your losses. Did you lose money on your investments? If so, you might as well sell them and take the capital loss. Commonly referred to as tax loss harvesting, losses (that exceed gains) are capped at $3,000, but you can carry them forward into future tax years. To understand why you might do this, here are 3 Benefits of Tax Loss Harvesting.
  5. Take your gains. Once again, you can pay 0% long term capital gains if you are in the 10% or 15% tax bracket. If you are planning to sell, you might as well do it before year end if you fall in this tax bracket!
  6. Review investment tax rules. Don’t forget about the 3.8% Investment Tax on investment income, including capital gains and dividends, that kicks in for high income filers. If you are subject to the investment tax pay close attention to your end of year strategy to realize gains and losses.
  7. Prepay your mortgage and real estate taxes. Even if your payments aren’t due until January, you can pay them in December to deduct this year, if you itemize. Should you pay this year or wait? For more information, see how to determine if you should accelerate your property tax deduction into the current year.
  8. Give away your money. If you were planning to give a lot of money to someone special, utilize your annual gift exclusion of $14,000. More than that and you are subject to the gift tax.
  9. Use your flex spending money. The use-it-or-lose it rule makes your money disappear if you don’t use it. Check your plan for the deadline to incur costs and submit reimbursement requests. If you don’t know what to spend your money on, see the list of ways to use all of your flex spending account. It’s also a good time to remember to enroll in your 2015 flexible spending account if you haven’t done so already. The $2,550 flex spending plan limit will go up $50 for 2015.
  10. Donate. We all know we can donate clothes, books, and household stuff to Goodwill. But dig deeper and you might be able to find more ways to make a charitable donation. For example, I like to remind newlyweds that you can donate wedding dresses and attire to take a tax deduction. Be sure to research the charity to make sure you know how your donations will be used.
  11. Finalize your records. If you plan to deduct mileage on your personal car make sure your mileage logs are complete. Remember you will save yourself time by being organized! Review how long you need to keep your paperwork before throwing out any records.
  12. Review your checklist. I keep an end of year tax planning and finance checklist. The checklist comes in handy to determine what needs to be done each year to keep our finances in order. If you don’t have an annual list, now is a great time to make one. Just write everything down as you go.
  13. Make 529 plan contributions. If your state has a deduction for 529 plan contributions, make your contribution before year end.
  14. Do an AMT analysis. If there’s a chance that you will be subject to AMT, analyze your deductions to see if you are better off waiting to make some of the above moves.
  15. Close your IRA. While this one is very extreme, I keep it in the list to remind you to review the performance of your IRA. If you carefully evaluated the pros and cons, and decided to take a loss on an IRA, you must close your account before year end to claim your loss on your taxes this year.
  16. Fund your IRA. You have until the tax deadline to maximize your Roth IRA contributions. However, if you’re getting an end of year bonus, it might be a good time to stash it away!
  17. Convert your IRAs. After running our tax estimates, I determine if it makes sense to make a Roth IRA Conversion. If you need to make one, don’t forget it needs to be done by the end of the year. In addition, if you are planning to use the Backdoor Roth IRA strategy this year, you also need to determine if you want to make your conversion by the end of the year.

Determine if You Need to Pay Tax or File

Finally, after you’ve reviewed all the end of year planning, review the requirements for filing and paying taxes. Finding out in April that you need to pay tax on unemployment, you made over the minimum income to file taxes, your kids need to file taxes or that your social security benefits are taxable aren’t usually welcome surprises. Do yourself a favor and review the requirements before the end of the year.

What additional moves are you planning to make for 2014 end of year tax planning?

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If you filed for a tax extension last April today, October 15, 2014, is the tax extension deadline for your 2013 tax return.

The original 2014 tax deadline for your 2013 tax return was on April 15, 2014. If you filed Form 4868 you got an automatic extension, which is due six months after the April tax deadline.

Tax Deadline Postmark

Whether or not you meet the tax extension deadline is based on the postmark on your taxes. You must have your taxes postmarked by the deadline, but the IRS doesn’t need to receive your taxes by the 2014 tax deadline. If you plan to mail your taxes, deliver it to the post office before closing time on October 15, 2014.

Can You Efile an Extended Tax Return?

Yes, you can efile an extended tax return. If you are using TurboTax or another efile option, you’ll also need to submit your return electronically by October 15.

Tax Filing Extension Does Not Extend Payment Deadline

Don’t forget the extension for taxes only pushes back the due date for filing your taxes, not the due date for tax owed. Hopefully, you paid the tax due by the original April 15 tax deadline. You can now reconcile the amount you paid using the Tax Estimator and your final return to get your tax refund. If you did not pay the tax due, you will be subject to penalties.

What if You Miss the Tax Extension Deadline?

If you miss the tax extension deadline today, you should file your tax return as soon as possible! Here’s how to get started on How to File Old and Delinquent Tax Returns. If you are putting off filing because you owe the IRS money, see What are Your Options When You Owe the IRS Money?

File and Amend

If you file today to meet the tax extension deadline, you can amend your tax return to correct mistakes. I wouldn’t plan on making an amendment, but if it’s the only way you can meet the deadline, it might be an option.

Self Employed Retirement Contribution Deadline

If you are self employed, October 15 is also the extended deadline for many retirement plan contributions.

If you have a Solo 401k Retirement Plan that was already set up, the deadline to make contributions is the tax-filing deadline for that year, including extensions. If you Filed an Extension to Lower or Hedge Your Tax Bill with this in mind, October 15 is the last day for solo 401k contributions.

The October 15 deadline also applies to SEP-IRA Retirement Plans. You can establish and fund a SEP-IRA today if you filed for a tax extension. In addition, employer matches for SIMPLE IRA Retirement Plans are also based on the tax extension due date.

It’s important to note that the extended deadlines do not apply to traditional and Roth IRA contributions.

File Your Extended Tax Return Online

If you put off filing until now, it’s time to get it done! Now that you know when the 2014 tax deadline is, you can file your tax return online with TurboTax.

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Most of us sit down sometime around the new year, organize our finances, and create a budget for the upcoming year. We plan out our expenses and how much we want to save. Then, many of us either put the budget aside and never look at it again, or we follow along, exactly as planned. No matter which camp you fall into, I am here to tell you that it is important for you to take a mid-year review of your finances. You don’t need to take a magnifying glass to each and every category, but rather take an hour or so to look things over. Here are some of the things you should be focusing on.

financial review

Mid-Year Financial Review Checklist

  1. Expenses
    It’s always important to keep an eye on your expenses. Now is a great time to look back over at what you had planned for the year and what has actually occurred. Are there some areas where you are overspending that you can cut back? Maybe there are some areas where you budgeted more than you actually needed.

    In both cases, it is important to know these things. If you aren’t spending as much as you thought, then you can adjust the amount you are saving or investing each month. After all, there is no point in leaving the money in a checking account. That is just tempting you to spend it.

    If you are spending more than you planned, it’s time to look at why and make the necessary adjustments. This could mean allocating more to the category in your budget or maybe simply cutting back.

    One additional step to cut back on expenses is to look at your bills – cable, internet, insurance, cell phone, etc. and see if there is a way to lower them. You don’t have to spend an entire weekend on this, just make a call to your service provider and see if there is any way they can lower your monthly bill. You’d be surprised to find it’s that easy to save $5 or $10 a month.

  2. Income
    We all love to have income. This too is an important area to look over. Are you earning more than you thought? Maybe you are earning less due to a layoff or career change. On the surface it might not seem like a huge deal if you are earning slightly less or slightly more than you planned, but it can have big consequences.

    If you are earning less, maybe you now qualify to save for retirement in a Roth IRA. If you are earning more, maybe you can bump up how much you are putting away in your 401k plan or are saving in general. Or maybe you can put more towards any debt you are still paying off. You might see some additional money if you have crossed the Social Security wage base.

    In the case where you are making significantly less than you planned, maybe it is time to look into getting another job or even turning some hobbies into income streams. If you do, be sure to review how to calculate self employment taxes.

  3. Investments
    Mid-year is a great time to review your portfolio as well. Look back at your investment plan to see what your intended allocation should be and where you stand. If you haven’t rebalanced lately, chances are your holdings are out of alignment. I typically rebalance when my holding vary from my plan by 5% or more. Take the 15 minutes to see if you are in line with your plan.

    Again, it might not seem like a big deal, but if you are too heavy in stocks, you are taking on more risk than you are comfortable with. If you have too much money in bonds, you risk not earning the high return you need so that you have enough money for retirement.

  4. Taxes
    Dreaded taxes. No one likes to pay them. But again, it is important you look over things in this area as well. Depending on your income, you might be withholding too much or not enough. While it isn’t the end of the world if you are withholding too much, withholding too little could mean a large tax bill in the new year. I don’t know about you, but having to pay into the system by writing a check in April always hurts. Make it a point to review your taxes so you don’t have any unwanted surprises.

    One other thing with taxes to consider is any life changing event. Have you gotten married or will be getting married later this year? Have you had a child or will be having a child? These events will impact your taxes so it is important to take the steps now while you still have time.

    My wife and I got married last November. In the summer we met with our accountant and found out that we were going to owe a lot in taxes last year because we would be filing a joint return. We made it a point to start taking every tax deduction we could – maxing out 401k plans, maxing out health savings accounts, and adjusting our withholdings. While we still ended up having to pay in April, it was a lot less than we would have if we weren’t proactive about it.

    With that said, taxes don’t stop there. You can work on getting some of your tax documents in order so that in the new year, it is one less thing you need to do. Create a folder and place your property and school tax stubs in the folder so you have them. If you have donated anything so far this year, be sure to place the receipts in the folder or at least write down what you’ve donated on a piece of paper so that you don’t forget about it and pay more taxes than you should. Also, keep any documentation needed for the new health insurance premium tax credit.

Final Thoughts

Creating a budget at the start of the year is a smart move to make if you plan on taking control of your finances. But it is equally important to review and adjust your budget as the months go by. We all know that life happens. As a result, we spend more in certain areas and less in others. By constantly reviewing your budget, you are able to see where you are overspending or under spending and make the needed adjustments. This could mean allocating more to certain areas or boosting your savings. Either way, an up to date budget ensures that you are doing everything you can to be financially successful.

More Mid Year Tasks from Years Past

With the volatility of the stock market and low interest rates, many investors are looking for ways to earn a decent return on their money and also keep their principal safe. While it is common knowledge that you cannot earn a high return unless you take on a higher risk, you can still earn a decent return while playing it safe. To do so, look no further than municipal bonds.

municipal bonds

3 Benefits of Municipal Bonds

Municipal bonds offer investors 3 great things: safety, income and tax benefits. But as with any investment, municipal bonds aren’t for everyone. Read on for each one of the benefits that municipal bonds offer and then you can begin to decide if there is a fit for them in your portfolio.

Municipal Bond Safety

Overall, municipal bonds offer investors safety. This isn’t to say that you cannot lose money when you invest in municipal bonds, but the odds of losing money are not high. This is due to the fact that they historically have had a very low default rate.

Of course, you can’t base all of you investment decisions on history. There are many communities in California that are bankrupt. In Michigan, Detroit recently declared bankruptcy. This means that bankruptcy and default on municipal bonds can and does happen. Before you invest in any municipal bond, make it a point to research the municipality of the bond you will be buying.

Some investors have made the mistake of thinking that municipal bonds are risk-free, meaning there is no default risk. This is not true. The only investments that are truly risk-free are US Government and Treasury bonds.

Municipal Bond Income

The next great feature of municipal bonds is the income they generate. While the income isn’t life changing, it usually ranges around 5% and is predictable.

Most all municipal bonds pay interest semi-annually. But you should be aware that many municipal bonds get called. This means that a municipality will retire a bond before it matures. For example, a municipal bond might mature in 20 years but have a call feature after 7 years. When the seventh year passes, the bond can be called by the municipality. You will receive your principal back, but you lose out on the future income payments. But, with your principal returned to you, you are free to buy other municipal bonds.

What happens when the community who issued a municipal bond defaults?
One more note about municipal bond income, in the case of a municipal bond defaulting, you will not earn the interest payments going forward as well. The municipality will simply suspend future income payments. It is rare for you to lose your principal when a municipal bond defaults.

Municipal Bond Tax Benefits

The third benefit of municipal bonds is the tax-free treatment of the income. Municipal bonds are tax-free on the federal level, meaning you won’t pay federal income tax or investment tax on the income. But, many states also offer tax-free treatment to their own municipal bonds as well. This means that if you live in Pennsylvania and buy a Pennsylvania municipal bond, you will not pay state income tax on the income either. In fact, you won’t pay local tax on it. This makes the income “triple tax-free”.

Note that not all states offer tax-free treatment on municipal bonds and that if you invest in municipal bonds from another state (for example, if you live in New York and invest in a municipal bond from Kansas), you will most likely have to pay state income tax on the income.

For many investors, the tax treatment of municipal bonds (along with the predictable income they provide) make them a wise choice for those who are retired. But, as with any investment, look into the tax treatment of the income for your state before you go out and buy any municipal bonds.

Final Thoughts

Of course, as great as municipal bonds sound, this doesn’t mean that you should rush out and buy a bunch of them. You have to determine if they fit within your investment plan. There is no point in buying something that doesn’t help you reach your goals. For example, a younger investor might not invest in municipal bonds simply because he or she needs a higher rate of return.

However, on the flip side, this same investor may want to invest in municipal bonds because they are in a very high tax bracket and want to limit income taxes. Before you do anything, you need to weigh the advantages and disadvantages of such an investment. Only after careful consideration can you make an informed decision that is right for you and your situation.

More on Municipal Bonds and Treasuries

In order to be a successful investor, one has to learn how to buy low and sell high. This can be hard since many of us allow for our emotions to get involved. As a result, we tend to buy high and sell low. But even when the buy low, sell high strategy is followed, there are times when it makes sense to sell low. When you strategically sell low in order to offset gains realized with other investment holdings, you apply the technique known as tax loss harvesting. Let’s walk through the various benefits of tax loss harvesting.

tax loss harvesting

What is Tax Loss Harvesting?

As I mentioned above, tax loss harvesting is when you sell a security for a loss. While on the surface this doesn’t make much sense, the benefit will be clear in an example. Let’s say I have two holdings, A and B. Holding A has produced a short term capital gain distribution for me. On the surface a capital gain payout is a good thing, but the downside to short term capital gain distributions is that the payout is taxed at ordinary income levels. Therefore, if you are in the 28% tax bracket, you will be taxed at 28% on that short term capital gain.

You can offset your investment gains with your losses. However, the IRS allows you to offset up to an additional $3,000 in income each year with investment losses. If I sell a portion of Holding B for the same amount as the short term capital gain distribution of Holding A, I offset that gain with my loss and don’t incur any taxes. In essence, I just saved myself 28% since I am in the 28% tax bracket.

Benefits of Tax Loss Harvesting

  1. Tax Savings.
    The first benefit of tax loss harvesting is the tax savings. Whatever amount of short term gains I can offset through selling “losers”, saves me on my taxes. Note that I don’t even need to have capital gains to save on taxes. Assume that I have no gains this year, but I sell a fund that I lost $3,000 on. I can apply that $3,000 towards my ordinary income, reducing the taxes I owe there. If I were in the 25% tax bracket, that $3,000 loss saved me $750 in taxes.
  2. Carry-forward Benefit.
    Another benefit of tax loss harvesting is the carry-forward benefit. Remember how I told you that you can offset $3,000 annually? Well if you have $5,000 in losses this year, you can apply $3,000 worth of the losses this year against your taxes and the remaining $2,000 in the next year. Just because you can only offset $3,000 per year doesn’t mean you lose any additional losses. You carry that amount forward until you are able to use it. I’ve known people that have $15,000 worth of losses that they carried forward for many years.
  3. Potential Higher Returns.
    Taking advantage of tax loss harvesting can allow you to realize a higher return. For example, let’s say you bought a mutual fund for $10,000 and you plan on holding it for a long time. But a few months after buying it the stock market drops and your $10,000 is only worth $7,000. You sell the fund and wait 31 days (more on the reasons for this later) and then buy back into the fund. At the end of the year, assuming you have no capital gains, you have a realized loss of $3,000 that you can write off of your taxes.

    That $3,000 is worth $750 to you if you are in the 25% tax bracket. With your reduced tax liability, you take the $750 and invest it back into your mutual fund. You then hold the fund for 10 years and it earns 7% annually for you before you sell it. After those 10 years, you have $15,375.16 as seen below:

    $7,000 + ($15,245.42-$7,000) * .85 + $750 + ($1,475.36 – $750) * .85 = $15,375.16

    Note that this assumes you are paying 15% in long term capital gains taxes. The $15,245.42 is what the $7,000 grew to in the 10 years and the $1,475.36 is what that $750 grew to. How much would you have if you didn’t sell your fund and held for the entire 10 years? You would end up with $14,458.61:

    $10,000 + ($15,245.42 – $10,000) * .85 = $14,458.61

    By taking advantage of tax loss harvesting, you earned an additional $916.55. This is all from the $750 that you were able to invest because of tax loss harvesting. If you held onto this fund for longer than 10 years, the difference would be even greater.

Notes About Tax Loss Harvesting

Wash Sale Rule. There are a few things you need to know about tax loss harvesting before you jump into it. The first is the wash sale rule. Without going into great detail, a wash sale is when you sell a mutual fund (or other investment) for a loss and buy back the same fund (or investment) within 30 days before or after the sale. If you do this, the IRS does not allow you to recognize any loss you realized on the sale of the mutual fund (or investment).

Taxable Accounts Only. Secondly, tax loss harvesting only makes sense in a taxable account. Since your retirement accounts, such as a 401(k), 403(b), Traditional IRA or Roth IRA accounts, are all tax deferred, you get no benefit of tax loss harvesting since any gains in these accounts aren’t taxed until you withdraw the money.

Final Thoughts

There are many benefits to taking advantage of tax loss harvesting. When I worked in a high net worth investment firm, we placed tremendous emphasis on tax loss harvesting as a way to reduce our client’s tax liability. Many times when we first did tax loss harvesting, our clients would question why we were selling so called “losers” and realizing a loss. Once we explained the benefits of this practice, and they saw the benefit when completing their taxes, they were on board 100%. I encourage you to analyze your investments to see if there is an opportunity for you to take advantage of tax loss harvesting.

More Tax Topics

Before you head out to file your taxes before the tax deadline, you’ll need to grab more than just your wallet to pay your tax professional for their services. There are a large number of items you need to bring with you when filing your taxes. In many cases, these items are essential to filling out your tax return. You’ll need documents, receipts, identification, and various other pieces of information.

Tax Checklist

If you have already filed your taxes, use this list as a checklist to make sure you didn’t leave anything off your tax return. If you did, you can amend your tax return.

photo by: Theen

Photo Credit: Theen

Your personal information

You’ll be sharing personal, sensitive information with your tax professional. That is exactly why it is a good idea to go to a reputable professional. Check reviews on the Better Business Bureau, and check their credentials.

Here are the various pieces of personal information you’ll need:

  • Your social security number and full name.
  • You’ll need your spouse’s social security number and full name. If you are filing jointly, your spouse will need to come along to sign the return as well.
  • To play it safe, you may want to bring along your social security card as some tax professionals may require it.
  • Date of birth for you and your spouse.
  • Bring the copies of your tax return from the last three years. Your tax professional can check for errors and also possibly use past information to help fill out this year’s return.
  • You may need a photo ID such as a driver’s license or passport.

If you were received income…

You’ll be reporting all of the income you received throughout the previous year. In many cases, if you were getting taxes withheld from your paycheck, you may be eligible for a refund.

Here is what you’re going to need to report all of your income:

  • Your W-2 forms for any place you worked that you have received from your employer. Your employer should have mailed these to you by the end of January. If you have worked somewhere in the past year and did not receive this form, check with the employer. Also, if you worked multiple jobs, you will need to report all of them.
  • If you searched for a new job during the year, you’ll need to know the amount you spent on your job search. These expenses include employment and outplacement agency fees, the cost of preparing a resume, and the cost of traveling to search for this job.
  • Your unemployment records and the amount of income you received from unemployment.
  • Income received from serving jury duty.
  • Any gambling income or large prizes or awards you may have won throughout the year.
  • Any other income you can think of.
  • Any income you received from interest, such as Forms 1099-INT or 1099-DIV.
  • Any foreign income earned.
  • Bring with the total amount of the costs for your employment such as a uniform or tools. This can possibly be deducted if you itemize deductions.

If you have children or other dependents…

If you have children or dependents, you will want to report this as you may be eligible for various tax credits.

Here is what you’ll need to bring if you have children or other dependents:

  • Know their social security number for your children and dependents along with their full name. Be sure the name matches their social security card.
  • Dates of birth for your children or other dependents.
  • Childcare records including the business tax identification number of your child care provider and how much you paid for childcare.
  • Expenses related to the adoption of a child.

If you are self-employed…

Being self-employed can allow great flexibility for a working environment, but it definitely can get a little tricky during tax season. It is important to bring all important documents so you can have your self employed tax deductions in line.

Here is what you will need if you are self-employed:

  • Any 1099 forms you have received in the mail from contract work you have done.
  • If your office is in your home, bring along this information as well. It is possible you can deduct a portion of your home costs or rent if you work from home.
  • Any business expenses you paid throughout the year.
  • Total business miles driven throughout the year.

If you attended college…

If you have attended college during the previous year or paid student loans, here are the items to bring:

  • Form 1098-T from your university, which indicated how much you paid for tuition.
  • The cost of essential books and supplies you were required to purchase through your university.
  • Form 1098-E from your student loan providers if you have paid interest on a student loan.
  • Information on any scholarships you received.

If you are divorced…

  • If you paid alimony during the past year, you’ll need the amount you paid and the social security number of your ex-spouse.
  • If you received alimony, you’ll need the amount and your ex-husband’s or ex-wife’s name.
  • Any documents proving that your ex-husband or ex-wife is allowing you to claim your child on your tax return.

If you paid for health care costs and insurance…

If you tragically experienced a theft or disaster…

  • If you were a victim of a theft, bring all documents proving this.
  • If you live in a region that was a federally declared disaster area, bring proof of that.
  • Bring costs of clean-up expenses, lost property, and rebuilding costs of an earthquake, fire, flood, hurricane, or tornado.

More Documents You Will Need

Here are more items you’ll need when you file your taxes:

  • If you own your home: Documents containing your mortgage payment and interest.
  • If you owned rental property: All of the records of the income you received and records of any expenses.
  • If you have an IRA: The amount you contributed to your IRA and the value of your IRA.
  • If you are retired: Your social security income and any pension income.
  • If you donated to charity: Bring any receipts for any charitable donations you gave throughout the year, such as dropping clothes off at a Salvation Army.
  • If you want to receive a direct deposit from the IRS: Bring a check that will have your bank name, routing number, and account number for your refund.

What are other important items are missing from this list?

More Tax Topics

Do you find yourself stressed out around tax time? What about even thinking about doing your taxes? If so, you are not alone. Taxes are often thought of as a dreaded part of the year causing stress and leaving people feeling overwhelmed and depressed.

Why Are Taxes So Stressful?

Sure, the act of filing taxes can be daunting, but there just might be more to it to explain why people are so stressed out about taxes. Here are some reasons you might be stressed when you think about doing your taxes this year and also how you can deal with that stress as the tax deadline nears.

WhyStress_by CollegeDegrees360

Photo Credit: College Degrees 360

You’re Dealing with Money

Ask people what their greatest stress is and chances are they are going to say money. People stress about not having enough money, not understanding money, spending too much money, not handling it well, not having a savings, not earning enough, and everything beyond that. Tax time can bring up stressful financial issues that occurred throughout the year. It can be especially stressful if you end up owing the IRS.

How to deal: Find ways to cope with the stress of taxes. Before you start your taxes, you may even want to take an in-depth look at your finances so you understand what your current situation is. Whether good or bad, understanding where you are at financially, can reduce some of the stress of not knowing.

You are Afraid of Being Audited

An audit is often a misunderstood, scary process. Too often people are scared to claim deductions or report certain things (like the Home Office Tax Deduction) because they believe it might flag an audit.

How to deal: First, understand what exactly an audit is and what happens when you’re being audited. This may alleviate some of the mystery of an audit and better explain what it is. Second, you can do things to reduce your chances of being audited. Fill out your taxes carefully to reduce mistakes and errors which can lead to an audit. Be sure your numbers add up and match any documents that were already sent to the IRS. Also, understand how tax brackets and tax laws work to know what you can get.

You are Intimidated by the Government

Many people are intimidated by the IRS, and it might seem like a scary thing.

How to deal: If you fill out your taxes correctly, you don’t have to worry. Keep your receipts and paperwork so if the IRS requests additional information from you or needs to do an audit, you can cooperate and make things easier for both parties.

It Causes Tension in Your Relationship

Once you are married and file with a spouse or domestic partner, it is now a joint responsibility. If you and your partner aren’t on the same page, this can cause fights and stress. Diving back into old financial arguments that happened throughout the year can occur and any previous resentment about spending issues or any other money issues can resurface. This can also bring light to any sensitive issues about one partner not feeling like they earn enough or being sensitive about the loss of a job or other negative financial situation that may have occurred throughout the year.

How to deal: Before jumping in to filing, make a game plan with your spouse. Go into it with a calm, patient, but thorough attitude. Don’t let issues escalate into an argument, and stay on point. Each of you can gather your specific documents like W2s, 1099s, or whatever else you have. Make a plan on how you should file. If you’re doing it on your own, have one spouse do it, as the other double checks his or her work. Have your spouse nearby so you can ask a question or get input if needed. If you’re getting it done by a tax professional, you should both be present in case a question or issue comes up that that specific person is needed for.

You are Disorganized

If you’re disorganized, you’re stressed. Whether it is specifically with taxes or with any other aspect of your life, being disorganized and not having a grasp on the situation is going to cause stress. Going through past business expenses for self employed deductions, searching for receipts and paperwork, and locating all of your important tax documents could get quite stressful if you haven’t been organized all year.

How to deal: Before you begin, make a list of what you need to file your taxes. Write down all of the paperwork and documents you’ll need. If you need to calculate what you spent on something, do that before beginning to file your taxes. Start a folder with all of your important documents you need to file and organize them by type. If you’ve already filed, learn from your mistakes and get organized for next year.

You Don’t Understand Tax Laws

Sometimes the stress associated with doing taxes is the result of not understanding the process of filing taxes, what taxes actually are, and the tax laws. People often wonder what applies to them, what doesn’t, and they may be unsure what type of credits or deductions they qualify for.

How to deal: Take time to learn which tax laws apply to you, how income is taxed and what you qualify for. Read credible sources from your local library or online which can make these issues clearer for you. If you file online using TurboTax, use their tax tips and video library. If you are still confused, consider visiting a trusted, friendly tax professional that not only can help you with your taxes, but also is willing to take the time to explain things to you so you know for next year.

Do taxes stress you out? Why or why not? How do you avoid the stress of taxes? How do you deal with it?

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The Sales Tax Deduction is a deduction of your local sales taxes, when itemizing.

What is the Sales Tax Deduction?

You are deducting the sales tax that you have paid this tax year on purchases. You can either deduct your state income taxes or your state sales taxes, and you cannot deduct both of these. Use the Sales Tax Deduction if you are itemizing your deductions on Schedule A.

When do I use the Sales Tax Deduction?

Use this Sales Tax Deduction if you are not deducting your state income taxes. There are two main reasons you would use this deduction:

  • If you’re living in state that doesn’t collect income taxes (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not collect income taxes. Tennessee and New Hampshire have a limited income tax and only tax dividend and interest income.), you may benefit most from this type of deduction.
  • Also, even if you live in a state that collects income taxes, if you made large purchases throughout the year with high sales taxes, this may be a good option as well.

More on the Sales Tax Deduction

If you are itemizing your deductions on Schedule A, you will add up your sales taxes. You must have a receipt for each purchase.

Use the Sales Tax Deduction Calculator provided by the IRS.

Sales Tax Deduction Expiring. Unless something changes in the current tax law, 2013 will be the last year that this deduction is available. For 2014 and moving forward, this will not be available.

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What is the Home Office Tax Deduction?

You may be eligible for a Home Office Tax Deduction if you use part of your home for a business use. This Home Office Tax Deduction can be used for all types of homes, and it is available for both homeowners and those who rent.

Who can use the Home Office Tax Deduction?

You can use this Home Office Tax Deduction if you use a portion of your home, either owned or rented, for your business. You must have a set room for regular and exclusive use for conducting your business.

You must also use this set, exclusive room for your principal place of business. If you own an office outside of the home but occasionally work from home, this wouldn’t be eligible for the home office deduction. However, if you own a location outside of the home but also use your home substantially and regularly for business, you can qualify for this deduction.

You may also qualify for this deduction if you are an employee and use part of your home for business use.

Options to Calculate Home Office Tax Deduction

There are two methods for filing for this deduction. First, the Simplified Option, allows you to multiply a prescribed rate by the allowable square footage (300 square foot maximum) of the office.

The current rate is $5 per square foot of home used for business.

Second, you can do the regular method which determines the actual expense for the home office including mortgage interest, insurance, utilities, repairs, and depreciation.

Here is more information on the Home Office Deduction provided by the IRS.

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For many people, they are relieved to receive a refund check from the IRS after filing taxes. After a year of hard work and the stress of filing taxes, it feels good to receive this money to put in your savings account or make your budget more manageable for a while. However, it is possible to owe the IRS after you file your taxes.

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Photo Credit: Tax Credits

You Might Owe the IRS Money if…

Essentially, the one huge, general reason why would you would owe is if you paid less tax during the year than your income level determines you should be paying. While the majority of people will get a refund after this tax season, it is estimated that more than 25 percent of the population will actually owe something instead. If you are asking yourself why do I owe taxes? Here are a few common reasons why you could actually owe the IRS money at the end of filing your taxes.

You are Self Employed

If you are self-employed, don’t have a boss, and did not pay taxes throughout the year, you will owe the IRS money that wasn’t withheld from your check, including income tax and self employment tax. Here’s more:

  • If throughout the year, you took on a project or did work that you didn’t get taxed for, this can result in you owing. For example, if you did consulting work or did tutoring on the side, you will owe tax on your extra income. If you are a freelance writer, photographer, graphic designer, or anything along those lines, this will also pertain to you.
  • When you are a normal employee of a company, you are most likely getting taxes withheld from your employer every time you get a paycheck. However, when you are a freelancer or contract employee, you do not get these taxes taken out. If that is the case, you are responsible for paying these taxes.
  • If you are a freelancer or working for someone by a contract opposed to a paid employee, you should have been filing quarterly to make payments throughout the year. Unfortunately, in addition to having a higher tax at the end of the year, you are also subject to fees and penalties for not paying throughout the year.
  • If you made the mistake of not filing quarterly or forgetting about these taxes, use this as a learning experience. This year, moving forward, choose to file quarterly instead. Keep track of all of your self-employment deductions to help offset your income.

Read more: Tips for Filing Your Taxes with Self Employment Income.

Your W-4 Allowances Are Too High

If you are paid employee, you most likely filled out a W-4 when you started your employment at your job. (Remember that stack of paperwork you filled out when you were starting at this job way back when?) While filling this out, you may have modified the taxes withheld (by increasing the number of allowances) to increase the amount you are taking home. While it may seem like a more appealing option to take the higher paycheck, if your income level does not match the amount of taxes you paid throughout the year, you’re unfortunately going to have to owe more. In summary:

  • If you modified this form and got larger paychecks throughout the year, you may now owe additional taxes if you did not withhold enough throughout the year.
  • The good news is that you can modify your W-4 with your employer so next year you don’t have the same problem.

You Have Other Forms of Income

If you received unearned income from sources that did not tax you throughout the year, you are subject to pay these now during your annual tax time.

Some of these can types of income can include unemployment benefits, interest you received from your bank accounts, alimony, if you won the lottery or another sum of money, social security, or royalties received.

Read more: Surprising Things That Count as Taxable Income.

Your Filing Status Changed

If your filing status changes, there is also a chance you might owe instead of collecting a refund this year.

What to Do When You Owe the IRS

You owe the IRS money, and you weren’t expecting it. Take a breath. While it may be quite overwhelming and even a little scary to owe the government money, there are ways to cope with this. Fortunately, the IRS offers some advice for those of us who may owe this year:

  • First of all, do not ignore it if you owe the IRS money. It is never a smart plan to ignore debt, regardless of the type it is. However, owing the government is even worse in some cases. The government can seize your property and financial assets if you don’t pay the debt. If you don’t pay, this will impact your credit as well.
  • If you are paying by check, you may want to make a copy of the check for your records. Keep track of the check number and date you sent it as well for your records to show you paid by the tax deadline.
  • You can also choose to pay the IRS by using a credit card. If you’ve been trying to deal with credit card debt, this might not be the best option for you. Increasing your credit card debt is never a good plan, especially if you are already struggling with it. However, if you have a lower interest rate than what the IRS will charge you, this may be the way to go.
  • You can request an installment agreement from the IRS. If you owe less than $25,000 in combined tax, penalties, and interest, you can request an installment agreement at Be sure you understand what this installment agreement means and how and when to make payments. You may also be charged a fee for this as well as interest to what you owe.

Read more: What are Your Options When You Owe the IRS Money?

Have you ever owed taxes when you thought you would actually be getting a refund? If you are a freelancer, how do you deal with owing the IRS? What are some ways people can get quick cash if they owe the IRS and weren’t expecting it?

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