Ten Essential Tips For Those Who Hate Tax Season, But Love the Refunds

Does tax season make you cringe? Do you hate the forms, paperwork and fine print? Have you already spent your refund on a new set of golf clubs or a summer vacation?

For many people, tax season stirs up many feelings about money and managing one's finances. Whether you're paying in or receiving a refund, it's difficult not to think about how hard you worked for your money, and how much goes out not only to the IRS, but to pay down credit cards, pay monthly utility bills, etc.

A recent national survey conducted on behalf of IHateFinancialPlanning.com, a new personal finance Web site, concluded that 77 percent of Americans hate financial planning and 72 percent don't have a financial plan for the future.

According to Judy Lissick, vice president with IHateFinancialPlanning.com, now would be a good time to make a Tax Day Resolution - vow to get your arms around your finances once and for all. Here are a few tips to help you get started:

  1. Quit overpaying your taxes. According to the Internal Revenue Service (IRS), the average tax refund in 1999 was $1,589. If you're someone who looks forward to this once-a-year cash bonus, you should understand the consequences. By overpaying your taxes, you're giving the government an interest-free loan. Lower your W-4 withholding and you'll receive more money from each paycheck. Instead of giving this money to the government each month, you can invest the extra dollars in your company retirement plan, an IRA or a mutual fund. To quit overpaying your taxes and lower your withholdings, ask the accounting or human resources department at your employer for a new W-4 form.
  2. Timing is everything. By law, employers are required to distribute W-2 forms by Jan. 31. If you're expecting a refund, be sure to file early. The sooner you file, the sooner you'll receive your refund, which you can use to pay down debt or invest. Likewise, if you owe money, it's smart to wait until the April 15th deadline (this year it's midnight, Monday April 17th because April 15th falls on a Saturday).
  3. File electronically. Not only is it faster and more accurate to file electronically, you can get your refund in half the time, according to the IRS. In addition, filing electronically allows you to deduct your tax preparation fees from your refund and receive proof from the IRS that they've received your return. To file electronically, visit www.irs.gov.
  4. Explore IRA options. Confused about Roth IRAs, deductible IRAs, non-deductible IRAs? The bottom line with IRAs is that they provide tax advantages to set aside money for retirement. For example, by contributing to a Roth IRA, you don't pay income tax when you withdraw the money (including gains, dividends and interest) assuming you are age 59- and the account has been open for five years. If your annual income is less than $95,000 for a single taxpayer or $150,000 for married couples filing jointly, you can contribute up to $2,000 per year, per person to a Roth IRA. In addition, you have until April 15 to contribute to an IRA (traditional or Roth) to reduce your tax burden for the previous year.

5. Don't skip tax deductions. It no longer requires a lot of homework and complicated forms to take a deduction. By preparing your taxes online or purchasing tax preparation software, you can learn the ins and outs of the tax code. Did you know you can deduct your expenses if you started a small business, enrolled in continuing education courses, paid a child care provider or incurred travel expenses while volunteering? Be sure to keep records of these expenses and document your contributions. And keep in mind that if your charitable contribution is more than $250, you'll need written documentation from the charity.

6. Keep a paper trail. Start a filing system for all paperwork (charitable receipts, un-reimbursed employee business expenses). As a general rule of thumb, you should keep financial records (tax forms, investment statements, bank statements, proof of deductions, etc.) for at least six years. Although the IRS has up to three years to initiate an audit, if they suspect income has been misreported by greater than 25 percent, they have up to six years. Therefore, any records pertaining to capital gains and capital losses, or the carryover of capital losses or charitable deductions, should be retained until they are no longer pertinent.

7. Max out your 401(k). If you're working, you should be contributing to your employer's 401(k) retirement plan. This is your best opportunity to take advantage of tax-deferred savings and contributions from your employer. Ideally you should contribute the full amount that you can, but at the very least, contribute up to the match offered by your employer - that's free money!

8. Live within your means. Spending less than you earn is the key to any financial plan. Experts recommend that if you're working, you should be saving 10 percent of your annual pretax income. After you've maximized your 401(k), consider an automatic withdrawal from your paycheck into an investment program. By lowering your take-home check, you'll train yourself to spend less, just as you did when you were making less money. If you receive a raise, before you get into the habit of spending it, increase your automatic investment.

9. Time your income wisely. If you're thinking about selling stock that will result in a large capital gain, consider postponing the sale until next year or balancing the gain with a loss from another sale. Similarly, consider the timing of your year-end bonus. Your employer may be willing to postpone the payment of your bonus check until the new year, which would avoid paying higher taxes this year.

10. Move your money from low- or non-interest paying accounts. According to the American Bankers Association, Americans keep $700 billion in commercial bank accounts that pay little or no interest. Millions more earn 2 percent or less. Alternatives to low- or non-interest paying accounts include credit unions or mutual funds. A good starting point is a money-market mutual fund paying 4.5 to 5 percent that offers immediate access to your contributions. Online investment sites now make it affordable (as low as $25 per month) to start a regular and rewarding investment program. Credit unions are typically sponsored by employers, unions, community groups or churches and are much easier to join thanks to new federal laws. Stop giving away money and start investing.