But whether you find the annual ritual of filing your 1040 to be arduous, confusing or just downright annoying, the truth is that it doesn’t have to be painful.
So says Karla Dennis, an enrolled agent and owner of Karla Dennis & Associates in La Palma, Calif.—she’s spent the last 20 years demystifying the sometimes scary and often confounding topic of taxes for individuals and businesses alike.
We sat down with Dennis to glean her top tips for staying organized, avoiding common mistakes—and even double-checking your tax preparer’s work.
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1. LearnVest: Why do many people find doing their taxes to be so tedious?
Karla Dennis: "A lot of people don't properly keep track of their finances throughout the year—and rely on their memories when trying to fill out their taxes.
But without thorough records, they forget what transactions happened a year ago, like whether they sold stocks, traded in a car or donated something to a school.
On the other hand, some people do keep track but then don't want to take the time to go back and parse through their files each spring.
Both scenarios are risky: Failing to report all of your income could trigger a hefty penalty, and forgetting to deduct a big expense means you won’t receive as big a refund as you’re owed.
2. So how can people better organize their tax information?
In a perfect world, I’d love to see every taxpayer use some type of online program that organizes bank statements and transactions.
But you can also try what I call the ‘12-by-12 organizing system.’ You spend 12 days during tax season taking an in-depth look at your finances from the previous calendar year—tackling one month per day. It’s more realistic than trying to do everything at once, and it makes the task feel less overwhelming.
When you’re in the weeds, make sure to review bank statements, canceled checks, credit card statements, and whatever else you think is relevant so you don’t gloss over anything important.
The main thing to double-check is that you aren't under- or over-reporting your income. How many people really look at their W-2 or 1099 to make sure it lists the correct amount they were paid? You shouldn’t just assume.
3. What’s a common—but avoidable—error people make on their returns?
You'll find this hard to believe, but many times people submit their returns with the wrong Social Security number. Maybe you know yours by heart, but if you have to record them for your spouse and children, it’s easy to make a mistake.
Perhaps you just eyeballed the nine-digit number quickly, and while eight of the digits were correct, one wasn’t. You wouldn’t notice something like that unless you reviewed it very carefully—which is why it’s important to do so.
If your Social Security number is incorrect, your tax records might get mismatched with the Social Security Administration, and your return may not be accepted.
4. Anything else that tends to trip people up?
Relying on old tax laws is a potential pitfall because laws change often.
Take retirement planning: How much money you're allowed to save varies based on the year, your age, and what type of account you have.
For instance, you can contribute $5,500 to an IRA if you’re 49 or younger—but $6,500 if you’re 50 and older. And in 2014 the contribution limit for a traditional 401(k) was $17,500, but it’s $18,000 this year.
The amount that you can deduct for child care is another amount that changes from year to year.
"People try to manipulate W-4s to get a refund ‘bonus,’ but there’s an opportunity cost to paying more than you should throughout the year. You could be investing that money."
There are penalties for making these mistakes. Let’s say you thought your tax liability was $7,500, but it was really $10,000. You’d get hit with a 20% accuracy-related penalty, plus a penalty for understating your taxes and interest.
To make sure you’re operating with the latest information, you can check out the I.R.S. website, visit a Volunteer Income Tax Assistance location, or consult your tax professional.
5. Are there any special considerations newlyweds should keep in mind around tax time?
One common problem that can occur relates to name changes. If a woman gets married and changes her name—but doesn't change it with the Social Security Administration—then she didn’t do it legally. And that could result in her not being recognized by the SSA.
So just remember that if you're changing your name, report it as soon as possible to avoid that issue.
Another thing to remember is that filing taxes as a married couple can be a little more complicated than usual, especially if both spouses earn an income. The partner who earns more usually bumps the couple into a higher tax bracket than either person is accustomed to, which can result in the couple owing taxes for the first time.
So it's important to make sure that you consider whether filing jointly or separately will yield the lowest tax liability for your specific situation.
6. There’s a common notion that you shouldn’t strive to get a refund because it’s basically an interest-free loan to the government. What’s your take on that?
I agree. The goal should be to break even every year. After all, we have a pay-as-you-go system—as you make money, you pay the taxes.
A lot of people try to manipulate their W-4 forms to get a refund ‘bonus,’ but there’s an opportunity cost to paying more in taxes than you should throughout the year. You could be investing that money.
7. Are there certain tax deductions people often miss?
People generally know about the most commonly deducted expenses, but they may not realize just how granular you can get.
For instance, you probably know that charitable donations are deductible—but perhaps didn’t realize that you can even write off your transportation costs when traveling to and from a volunteering event.
In the same vein, maybe you’ve heard that you can deduct business expenses, but you didn’t know that you can also deduct the costs of job seeking—like getting your résumé reviewed or working with a recruiter.
8. Do certain people benefit from tax professionals more than others?
I’d recommend working with a tax professional anytime you’re not comfortable filling out the forms yourself—but it can be especially helpful in key situations.
When you're self-employed, for instance, you might work for a wide variety of clients and have dozens of 1099 forms to include. When you’re piecing together information from lots of different sources, it’s easier to make mistakes.
On the other hand, if you were laid off and on unemployment, or if you changed jobs, you may also benefit from a professional’s help in wading through that paperwork.
But if you like filing your taxes yourself, you can always go in for an occasional check-up, like you do with a doctor. You can hire a tax professional just one time to look over your taxes before you submit them.
"I'm baffled that people put up with tax professionals they don't even like. People will say, 'He loses my stuff. He doesn't see us on time. He's grumpy.' You can switch!"
9. If you want to hire a tax professional for the first time or switch to a better one, what should you look for?
You want to work with someone who’s either an enrolled agent or a CPA. Both designations require extensive certifications and testing.
Beyond that, I’d focus on finding a professional who will take the time to give you customized advice—not someone who’s using a generic checklist when reviewing your paperwork.
And if you want to change tax professionals, it's not as hard as you might think. Usually, you just need to send a new preparer your tax returns from the past two years. But worst-case scenario, the tax professional can likely get a copy of your prior tax returns from the I.R.S.
I'm baffled that people put up with tax professionals they don't even like. People will say, 'He loses my stuff. He doesn't see us on time. He's grumpy.'
You can switch!
10. If you do hire a tax professional, should you double-check that person's work?
You should definitely review it—particularly to verify that your name, Social Security number and address are accurate.
You’ll also want to confirm that the number of children and rental properties you have are correctly listed. Those are big details that can affect your ability to claim credits or report the proper amount of income.
Then look at last year's return and compare it to the current year. If your adjusted gross income varies by more than, say, 8% to 10%, ask yourself some questions to find out why—like whether you got a raise or, for some reason, made significantly less money this year.
This will ensure that no mistakes were made."
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the individuals interviewed or quoted in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.