Even if you expect a refund this year, you probably still dread the annual ritual of organizing your paperwork and searching for deductions. We have some ideas for making tax season more tolerable and potentially more profitable.
The deadline to file your 2011 income tax return with the IRS is April 17. Here's how to avoid some of those tax-time headaches:
Go digital: Save time by automating your tax preparation and filing. Intuit, the maker of TurboTax, the best-selling tax-preparation software, says its average user will be done in about two hours—the average is four hours. Taxpayers in 37 states and the District of Columbia can file their federal and state returns in one transmission to the IRS. Plus check out the Free File section of the IRS website.
Start early: Even if you're organized, one or two pieces of paper, such as an earnings statement mistaken for junk mail or a misfiled receipt, may have gone astray. Or you may have questions for a tax professional or the IRS. Build in at least two weeks to accommodate those possibilities.
Organize paperwork: Tax preparers and accountants say that disorganized receipts and tax forms cost their clients money. Get an accordion folder and use each section to store documents for a different category, such as, charitable contributions, W-2 forms, Form 1099s, consulting and freelance work, business and job expenses, and income and expenses from rental properties. IRS Publication 552, Record keeping for Individuals (PDF) outlines what you should keep and for how long.
Consider sales taxes: Use the IRS Sales Tax Deduction Calculator to figure the amount of state and local sales tax you can claim. You can deduct either state and local sales tax, or state and local income tax on your federal form, whichever is greater. If you live in a high-income-tax state (California, Massachusetts, Minnesota, New York) don't bother, even a major house-remodeling project, four-star vacation, or new car might not produce enough sales tax to exceed your state income-tax bill. If you live in a no-income-tax state (Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming) you'll likely gain with the sales-tax deduction. Same with New Hampshire or Tennessee because they tax only interest and dividends.
Assess alternative minimum tax liability: For tax year 2011, the exemption amount for AMT for individuals and heads of household has increased to $48,450 ($74,450 if married filing jointly, $37,225 if married filing separately). The IRS has a 2011 AMT Assistant that can help you figure out your potential tab.
Mind the cost basis: Establishing the cost basis of old investments, including stocks and real estate can cause a migraine. The cost basis is the purchase price plus costs associated with selling the investment, and any capital improvements in the case of real estate. You pay capital gains tax on the difference between that and your selling price, so the higher the cost basis the less tax you'll owe. You can claim up to $3,000 in investment losses in a given year; the balance can be carried forward to future years. For more details click here, plus learn more about calculating cost basis, by reading IRS Publication 551 Basis of Assets (PDF).
Get an extension: There's no penalty if you pay your estimated taxes by April 17 and that payment is at least 90 percent of what your final return shows. This year’s extension deadline is Oct. 15.
Plan ahead: Start thinking about next year and organize your papers for 2012, or purchase software like Quicken to keep track of your receipts.