Tax season can be a stressful time for taxpayers. From the last minute scramble to compile records to the uncertainty associated with whether unexpected money is owed to the IRS, tax time can create a tremendous amount of anxiety. In fact, according to Michael McKee, a Cleveland Clinic psychologist and president of the U.S. branch of the International Stress Management Association, "Money is a major source of stress on people, and what tax season does is shine a great big spotlight on the issue." While tax time can certainly be difficult, there may be a few things you can learn from it to be more prepared next year. Remember, now is the time to address next year’s return.
Outsource your stress
Despite calls by some politicians to simplify the tax code, the bottom line is that it can be quite complex and overwhelming in its current form. Rather than prove you are capable of struggling through your taxes on your own, why not consider outsourcing this stress and aggravation to a CPA tax professional that can help. Sure, doing your own taxes can save you money. However, ask yourself how much your time is worth as you pour over your own documents and are still left wondering if you missed anything. While leveraging tax programs can help, the stress of being sure that you didn’t forget anything still lies squarely on the taxpayer’s shoulders.
Outsourcing can also be incredibly important for business owners who are even more strapped for time. In addition to having a capable accountant, it may be advantageous to leverage the services of a bookkeeping professional. Doing so may reduce the stress that comes with preparing accurate tax information for your accountant – especially if you typically wait until the last minute. Judy Syms, owner of Proficient Accounting Solutions, a professional bookkeeping service in Long Branch, NJ notes “Bookkeeping tasks are handled weekly or monthly so at the end of the year there is no need to play catch-up for the accountant. Further, by having accurate financial records during the year, the business owner has the benefit of knowing the bookkeeping is done correctly and there are no year-end surprises.” When it comes to accounting, the fewer surprises the better.
Review your tax withholdings for 2016
A great deal of stress also comes from failing to properly withhold for income taxes. Remember, under withholding can result in significant penalties and interest. In general, you may owe a penalty for 2015 if the total of your withholding and timely estimated tax payments did not equal at least the smaller of either 90% of your 2015 tax, or 100% of your 2014 tax. (Your 2014 tax return must cover a 12-month period.) Now may be the time to make some modifications to avoid any issues in 2016.
While failing to properly withhold can lead to penalties, a larger percentage of taxpayers actually end up over-withholding. According to the IRS, nearly 70 percent of federal tax filers are expected to receive a tax refund for overpayment. In fact, 109 million taxpayers received an average refund of $2,797 last year. Over-withholding is not limited to federal tax returns alone. State returns can also be significant with estimates that the average NJ resident received $2,960 for over-payment.
While receiving a tax return is certainly better than owing money, it is important to be aware that it is called a “tax return” because the government is simply returning your money after they have used it during the tax year. For this reason, it may be time to consider an adjustment of your tax withholdings.
An adjustment of tax withholdings could free up precious cash flow that can be applied toward other goals such as paying down high interest debt, saving for retirement or building a cash reserve. Since increasing your allowances too much can lead to owing more at the end of the year, consider speaking to your tax advisor prior to making any adjustments.
Increase pre-tax deductions
One of the best ways to reduce the financial stress of tax season is to minimize amounts owed to the IRS. One approach to reducing liability is by increasing pre-tax deductions. From boosting 401(k) contributions and Flexible Spending Accounts (FSA) to the use of Health Savings Accounts (HSA), consider leveraging opportunities (where appropriate) to reduce your adjust gross income (AGI) for next year. Consider speaking to your human resources department to determine what benefit opportunities you may be overlooking at your company.
A proactive approach to tax planning that includes carefully monitoring & adjusting withholdings as needed, increasing tax advantaged savings while leveraging accounting and bookkeeping professionals throughout the year may be an effective way of limiting the financial stress when next year’s tax season arrives. Since everyone's situation is unique, consider speaking to your tax adviser to determine the most appropriate approach for you.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.
