Get a Jump on the Tax Man
As the clock strikes midnight on Jan. 1, it will also usher in the start of tax season. As everyone knows, you have until April 15th to file your state and federal income tax forms. But many tax experts recommend getting an early start to beat the mad deadline dash. What’s the rush? “If you’re entitled to a refund you’ll get your money sooner by filing your tax return much earlier than the April 15th filing date,” says Dennis N. Middleton, CPA, founder of Oakland, California-based Dennis N. Middleton, CPA, accounting firm. Since the government is holding on to your hard-earned dollars without paying interest, your aim should be to get your money back, quickly.
The first place to start: organizing receipts. If you’ve been lax in keeping track of receipts from charitable donations and medical expenditures—including co-pays from doctor’s visits and prescriptions—you’ll need to start doing so. For those who pay church tithes, “ask for a printout of your year-to-date contributions,” says Genevia Gee Fulbright, president and COO of Fulbright & Fulbright in Durham, North Carolina.
Here are several scenarios taxpayers found themselves in last year—and some hints about where to begin with taxes. If you…
…purchased your first home or purchased a home after more than three years, you’re likely eligible for the $8,000 homebuyer tax credit. To verify your home purchase when filing taxes, make sure you have the U.S. Department of Housing and Urban Development Settlement Statement (HUD-1) on hand, which is typically issued to homebuyers at closing. If you don’t have a copy of the statement, contact your real estate agent or attorney for the documentation, Fulbright says.
…looked for a new job, make sure you’ve documented all your search related expenses. “Job-hunting expenses are treated as miscellaneous itemized deductions, and they must exceed 2% of your itemized deductions,” says Middleton. These tax deductions can only be claimed by those who are looking to change jobs, not career fields, according to the IRS. You are eligible to deduct employment and outplacement agency fees, expenses for preparing and mailing copies of your résumé to prospective employers, and travel and transportation expenses.
…volunteered you can deduct mileage and other related expenses. “Summarize it on a monthly basis,” Fulbright recommends. For those of you who’ve forked out money for work—training, materials, or other unreimbursed work-related expenses—those too are tax deductible.
…got divorced, reassess your financial picture. Between alimony, child custody, and the emotional angst, divorces get ugly. Aside from sorting out who gets what, there are also tax implications to consider. “This year, if you’re going to be filing as “single” or “head of household,” you might need to change your withholdings,” says Fulbright. To do this you’ll also need to figure out who will claim the children, something that should have been settled in the divorce decree. Financial challenges sometimes force new divorcees to dip into retirement savings. If that is the case, that money you withdrew is now considered taxable income and can bump up your income bracket and your taxable income.
…were self-employed and contribute to a Simplified Employee Pension plan (SEP) you’ll want to start calculating how much you can contribute to the retirement plan for 2009. Though the cutoff date for the contribution is April 15th —or your new deadline if you filed for an extension—it’s not too early to determine how much of your net profit, up to 20%, you can contribute to the fund. “You don’t want to be surprised by having made more income than you anticipated so every deduction helps,” says Fulbright. “If you are self-employed and haven’t been making any contributions to your SEP you want to take a look at that so you’re not hit with penalties, but this is only for those with a SEP plan.”
This article originally appeared in the January 2010 issue of Black Enterprise magazine.