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The Intersection of Taxes and Simplifying Life
If organizing your income tax data is like a tedious scavenger hunt each March, there are ways to take the pain out of the process and to get more out of doing your tax return.
By Susan E. S. Howe, CPA | Howe Advisory
Most of us think of taxes as a chore; a painful once-a-year obligation. If organizing your tax data is like a tedious scavenger hunt each March, there are ways to take the pain out of the process and to get more out of doing your tax return. Here are some tips on how to reduce your tax bill this year and to make it much easier to organize and save time and money in the future.
The first step is to treat the tax return process as a year-long project rather than a mad dash toward a finish line. Just keeping one folder and dropping in all forms and receipts as they arrive will save a lot of time at the end of the year. Even better, keep a chart or spreadsheet that you update during the year for expenses, charitable contributions, and other tax items. If you track items when they are fresh in your mind, you’ll be less likely to omit them at the end of the year, and getting your tax return done will be a cinch. It’s also good to pull out your prior year return and compare, so you are sure you have assembled all pertinent information.
A great incentive to clean out your closets and do some good by donating items you no longer use is the tax deduction you can take for donating property to a qualified organization. To maximize your benefit, make a detailed list of the items and their condition. Don’t use a note like “bag of clothing.” Instead, list out each item and keep the list in your records. If the IRS challenges the deduction or the value you have assigned, this type of itemization is your best defense. Keep in mind that the deductible amount is the fair market value of the property at the time you donate. This is typically anywhere from 10 percent to 30 percent of what you paid, even if the goods are in excellent condition. If you plan to donate more valuable property, such as antiques or artwork, be sure to have an appraisal to back up your value.
Make sure that the organization to which you are donating is a qualified organization under Section 501 of the Internal Revenue Code. The organization must give you a receipt for the items you donate, and any organization will be able to confirm its status as a qualified charitable organization. Most organizations will not place a value on your contribution. That’s up to you.
One caveat is that you must itemize your deductions on your tax return to take advantage of the charitable contributions deduction.
Another item that is sometimes overlooked is a sales tax deduction for large items if you use the deduction for sales tax rather than state income tax. Especially for Pennsylvania retirees or people who live in a state with low or no income taxes, buying a new car or recreational vehicle can result in a large sales tax payment that can be added to the amount calculated from the IRS sales tax deduction tables. Sometimes this easily exceeds the deduction for state income taxes.
Thinking of your tax return preparation as a small ongoing project rather than a dreaded and ominous chore will take the anxiety out of the process and may net you some tax savings you had been missing. This is one change in mindset that yields multiple benefits.
Susan E. S. Howe, CPA, is principal of Howe Advisory in Strafford, Pa.
