Tips to Beat Tax-Time Stress

As seen in the Concord Journal in March 2012
By Lee C. McGowan, CFP^®

People lament that the only two certainties in life are death and taxes. Perhaps that is why these concerns may also be two of the most stressful aspects of life. According to the Gallup-Healthways Well-Being Index, the second most stressful day for people in 2011 was April 18, income tax filing deadline (the most stressful day was April 27, the day nearly 350 people died from the largest outbreak of tornados ever recorded in the United States).

If you are experiencing stress and attribute some or all of the stress to tax time, the first step is to followthe guiding rule of “Know Thyself” and the second step is to understand the solutions.

Why the Stress?

Taxpayers have different reasons for being stressed during tax time. The stress may result from procrastination, complexity of their financial situation, the amount of tax owed, the ever-changing tax code, a potential audit,changing tax forms and instructions, or some other viable reason.  You may think that your tax-time stress is due to several interrelated reasons. On the other hand, you simply may be too busy to make the effort necessary to gather your tax documents, expense information, and other tax-related items. No matter the root of your stress, many of the underlying reasons may be avoided with proper planning and preparation.

Tax Man Cometh

If you are a procrastinator (whether due to your complex financial situation or your lack of enthusiasm for studying the tax code) and put off today what you still can do in mid-April, you are not alone. At this time last year, the IRS had yet to receive 42% of the expected tax returns (it had received 82 million of the 141 million returns expected for 2011). If you are among the millions who have not yet filed in 2012, tax day is looming. You have until Tuesday, April 17, to file your returns. The traditional tax day of April 15 is on Sunday and Monday, April 16, is Emancipation Day in the District of Columbia.

Planning and Preparation

The key to reducing tax-time stress most likely lies in planning and preparation. Potentially, you may lower your tax burden and reduce your stress with a professional tax preparer or tax preparation software such as TurboTax or TaxAct.  In conjunction with a financial team, the preparer should be able to guide those who have complex situations and take advantage of tax law changes.  Whether you use a professional preparer or a tax software program, stress may be reduced by keeping good records throughout the year.

Start a Tax File

Create a place in your home where you store tax-related documents.  For 2012 income taxes, begin your tax preparation just after you file your 2011 returns. Gather and file information from the first of the year, including receipts for expenses that are potentially tax deductible, such as charitable donations, medical and dental expenses, tuition, daycare and unreimbursed work-related expenses.  If you are tech-savvy, try an electronic receipt and tax organizer such as NEAT Receipts Software. There also are apps for that, one of which is called “Tax Organizer.” Paying taxes is not a once a year proposition; in order to beat tax-time stress, consider making tax planning a year-round activity as well.

Be One of the 7% – File an Extension

If you simply will not be prepared to file your taxes on April 17, you can file Form 4868 for an automatic six-month extension.  Be cautious. This extension to file taxes is not an extension to pay. In other words, you will need to estimate what you owe or pay at least the total income tax you paid in 2010 or 90% of your 2011 income tax due. There are income limits regarding this matter; it is recommended that you seek the guidance of a tax professional if you wish to file for an extension. If you do not pay the proper amount of tax with the extension, you risk being assessed interest and penalties. The IRS reports that about 7 percent of taxpayers seek a six-month extension to file.

Minute-Man Tip #12:  Fund a SEP-IRA

Tax Deductible Retirement Plan Contribution: If you earn self-employment income (e.g., board director, freelancer, sole-proprietor) consider funding a SEP-IRA (Simplified Employee Pension) by the tax-filing deadline plus extensions. You may have up until October 15 to open and fund your SEP-IRA with 25% of W-2 earnings or 20% of net self-employment earnings. Also, with proper planning, there may be other retirement plans that allow you to contribute a larger dollar amount and receive a larger tax savings. Keep in mind, the types of retirement plans and contributions to the plans should be viewed in the context of your overall plan.