Questions of the Week
Five Things To Do Right After You File Your Tax Return
Just like that, the 2020 tax season has ended. It’s definitely been one for the record books: moved deadlines, IRS delays, the Paycheck Protection Program, oh…and a pandemic.
Enjoy that feeling of relief for a minute. Savor the idea that you don’t have to run around collecting documents, checking numbers and worrying about whether you understood the rules. But just for a little while. It’s tempting to throw your return in a drawer or a folder on your desktop and not think about your income or deductions for another year, but I want you to do a few things while your taxes are fresh on your mind.
Review your return
Your tax return is probably the last thing you want to look at right now, but now, with the details fresh in your mind, is actually the best time for a review. Why?
First, you can catch mistakes. All of us, including professional tax preparers, can make errors. And even with the best tax preparation software, anyone can still transpose some numbers or forget to enter something altogether. Go through your return and make sure your income figures and the amount of tax withheld match what was reported on your tax documents. If you find a mistake, you can always file a 1040X and make adjustments (which you can now, for the first time, file electronically). Also don’t forget to confirm that your filing was accepted. You or your tax preparer should have received Form 9325 confirming that the date it was accepted, with the submission ID of the return.
Second, you can start planning for next year. Use last year’s tax return as a guide to the types of deductions you’ll need to track this year. Maybe you didn’t get to deduct the maximum last year. With a little planning, this year, you can. For example, if you started itemizing last year, think about maximizing charitable contributions next year. Or if you file a schedule C business return, you can take advantage of more business-related expenses that you didn’t track the previous year. Taking 15 minutes to understand and review your previous return will save you a lot of time, money and stress in the following year. If you need a primer on what you can and cannot deduct, you can get more info on that here.
Get organized now
Last year’s tax return can also tell you which documents you’ll need to gather for this year, and that gives you a head start in assembling required information. It’s easy to lose track because we get so many tax documents.. Paying student loan interest? You have a 1098-E. Got some interest from a bank account? Look out for your 1099-INT. You can create a checklist to quickly identify what you need. Once you get the documents, keep them all in one envelope or folder for easy access.
Adjust your withholding to keep your money
The moment of truth comes when you finally finish your return and figure out whether you owe or will get a refund. Most people are elated when they get a refund (the larger the better, right?). And others feel inadequate or like they’ve done something wrong because of the stigma associated with owing the IRS.
However, owing is actually good, to a certain extent. It means that you’ve kept more of your money to spend how you like, rather than giving the government an interest free loan. The time value of money principle states that that money is worth more to you now than in the future because of the interest you can make on it. So, keep more of your money in your pocket.
If you’ve received a huge refund, adjust your W-4 exemptions to get more money in your monthly paycheck. If you owe, make sure it’s not so much that you can’t pay it back. If it is too much to pay, you can have more money taken from your paycheck or make additional payments quarterly to ensure that you can pay any balance that comes next year.
Quote of the Week
“I believe luck is preparation meeting opportunity. If you hadn’t been prepared when the opportunity came along, you wouldn’t have been lucky.” – Oprah Winfrey
Task of the Week
Go through the steps I list above. You’ll thank me for it come next tax season.