I’m a Tax Expert: 3 Ways You’re Making Your Taxes More Complicated Than They Need To Be
Tax season generally isn’t considered to be a fun time of year. On the contrary, many people dread doing their taxes, even if most of the process involves sending documents over to a tax preparer.
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A big part of tax dread tends to be how complex taxes can be. Good luck trying to memorize the thousands of pages of text in the federal tax code, for example. And even if you know what you’re doing more or less, taxes involve money, and whether you owe taxes or are due a tax refund, that can introduce another layer of complexity into the equation.
That said, many people make taxes more complicated than they need to be. Here, two tax experts share some examples of this unnecessary complexity and how you can simplify your taxes.
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Tying Taxes to Emotion
One way to complicate your taxes is to attach emotion to every W-2, 1099, etc.
“It’s my opinion that for many people the actions of preparing their income tax returns; collecting documents for their tax preparer; and paying additional taxes — if that applies — are laden with emotion,” said Sallie Mullins Thompson, a tax strategist and CEO of Sallie Mullins Thompson, CPA PLLC.
“At these times the person’s entire ‘money story’ is activated and his/her entire past, present, and future finances pass before their eyes,” she said.
So, while easier said than done, try to think of taxes as something that’s an objective, routine part of life. Regardless of your emotions, the amount you owe or get as a refund is the same, so focus on the logistics of completing your tax return, and don’t feel like you have to do everything yourself.
“My recommendation is to use online tax software and/or engage a tax professional,” Mullins Thompson said. “The IRS does provide multiple free online and in-person options for tax return preparation for different demographic needs.”
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Not Understanding Relevant Deductions and Credits Before Trying To Qualify
Another way people complicate their taxes is by trying to qualify for deductions and credits without realizing what exactly that entails. As a result, you might end up doing a lot of unnecessary work.
“Taxes have a lot of thresholds for who qualifies for certain credits and deductions. Many of them phase out at various income levels or have a certain amount of expense needed to qualify for the deduction. By understanding the thresholds, taxpayers can save themselves a lot of time, aggravation and disappointment by understanding the basics of thresholds,” said Jody Padar, vice president of tax strategy and evangelism at April, a tax software provider.
One example, she said, is doing the work to try to deduct medical expenses without realizing if you even have a shot at qualifying. For one, you need to itemize your taxes to qualify for certain medical expense deductions, and you can only deduct those that exceed 7.5% of your adjusted gross income.
However, you might do a lot of work to try to qualify even though you, say, only have a few hundred dollars of medical expenses as opposed to several thousand or tens of thousands needed to qualify for the deduction, depending on your income.
“For example, a person saves all their medical receipts, goes to the pharmacy to get a printout of all their copays, etc., only to understand that they don’t have enough medical expenses for it to matter,” Padar said.
Not Keeping Adequate Records
Another way to complicate your taxes is to keep inadequate or disorganized records, which adds time and confusion when you get ready to file. Even if you qualify for deductions for things like medical expenses, you need good records to simplify the process. And sometimes you need records dating back several years, depending on the situation.
For example, if you don’t have good records of your stock basis, meaning how much you bought stock for originally, it’s hard to calculate your capital gains taxes.
“If you bought the stock from your current financial advisor, if they are human or online and you sell that same stock with the same financial advisor that information is typically included in your gain/loss statement. However, people transfer assets to different advisors or brokerage houses and the cost basis doesn’t always follow,” Padar said. “So a few years later they go to sell something and they have no idea what the basis of the original purchase was. And if the stock was gifted or part of an estate it gets even more complex.”
Without these clear records, you could end up overpaying or underpaying your taxes, both of which can be negative.
Get Involved
As these examples show, taxes can be even more complicated if you take a haphazard approach. And while you don’t have to do everything yourself, you can play a central role in simplifying your taxes and potentially qualifying for more tax breaks. To do so, though, you have to be willing to get involved.
“You don’t have to be a tax expert or professional to be aware of the tax changes that happen every year,” Padar said.
For example, it’s easy to look up retirement-related tax breaks to see how much you can put into accounts like your 401(k). And if you use tax software or a tax preparer, know that it can be a bit of a two-way street, as they often will ask you questions to accurately file your taxes.
“Read the questions you are asked carefully and follow up with the software or tax provider if you don’t understand the question exactly. Tax software and tax professionals can only provide complete and accurate tax returns if they are given complete and accurate information,” Padar said.
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This article originally appeared on GOBankingRates.com: I’m a Tax Expert: 3 Ways You’re Making Your Taxes More Complicated Than They Need To Be