If filing your 2004 income taxes was chaotic and stressful, then maybe — while the pain is fresh in your mind — you should take...
NEW YORK — If filing your 2004 income taxes was chaotic and stressful, then maybe — while the pain is fresh in your mind — you should take steps to make taxes less taxing next year.
Experts say a little preparation now will go a long way toward making things easier next April.
“For most people, the big problem is record keeping,” said attorney Bob Scharin, who edits a newsletter called Practical Tax Strategies from the tax-information publisher RIA. “Their stuff is scattered all over, and they can’t find it when they need it.”
The solution, he said, is to set aside a large envelope to put tax-related receipts in as you get them.
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“For example, if you itemize and take a deduction for charitable contributions, you’ll need to keep charitable receipts,” he said.
Saving receipts is especially important for taxpayers who want to take advantage of the new law that allows them to deduct state and local sales taxes instead of state and local income taxes, Scharin added.
“If you’re planning to take the sales-tax deduction and claim actual expenses, get a big envelope,” he said. “Maybe every month, do a subtotal for that month so at the end of the year it’s easier to put it all together.”
Donna LeValley, a tax attorney and contributing editor of J.K. Lasser’s “Your Income Tax 2005,” suggests taxpayers sit down with their 2004 returns and do a little detective work.
“If you ended up with a large refund or large tax bill, it’s time to revisit your W-4,” LeValley said.
The Internal Revenue Service Form W-4, which most workers can obtain from their employers or download from the IRS Web site at www.irs.gov, determines how much is withheld from wages to pay annual income taxes.
Another thing to look for on this year’s tax return is what you were eligible to deduct but didn’t, LeValley said.
There are some potentially good tax breaks for workers who sign up with their employers for flexible-spending accounts, which can be used to cover co-payments at doctors’ offices or medicines; dependent-care accounts, which help cover the cost of child care or services for aging parents; and transit and parking accounts, which can be used for bus and subway passes or parking. Employees who set aside money for these accounts reduce their taxable income by the same amount, LeValley pointed out, and that can lower their tax bill.
Workers also can reduce their taxable income by contributing to their employer-sponsored 401(k) retirement plans. The contribution limit this year is $14,000; workers 55 and older can make an additional $4,000 “catch-up” contribution.
The alternative for workers who don’t have retirement plans at work is the Individual Retirement Account (IRA), which can be set up at a bank or brokerage house. The contribution limit for IRAs is $4,000 this year; workers 55 and older can contribute $4,500.
Practical Tax’s Scharin said investors can find tax preparation especially trying because of the complexity of calculating gains and losses as well as the differing tax treatments of short- and long-term capital gains.
Scharin also suggests investors deal with the tax implications of stock sales when they occur:
If you’re selling an investment, find the papers detailing what you paid for it so you’re prepared to calculate gain or loss.
If you’re coming into unexpected income after selling stock at a profit, consider making an estimated tax payment “so you won’t be hit at tax time.”