Taxes are by far the biggest item in your household budget, says the Tax Foundation, which keeps tabs on how much of your income is siphoned off by federal, state and local governments. The latest available figures reveal that the average American spends almost three times as much for government than for food.
That disheartening statistic underscores just how costly a mistake it is to think of federal income taxes as simply a once-a-year affliction caused by the need to grapple with Form ++ 1040. What you should do is make tax planning a year-round concern and thereby position yourself to take advantage of the scores of tax-saving opportunities that most individuals overlook each year.
As part of your planning, play Santa and treat yourself to a nice notebook or computer program to get your records in order now. Follow that up with a New Year's resolution to commit yourself to keeping careful and complete records throughout the year. Good record-keeping is the key to mapping out strategies by which the federal indenture can legally be avoided, lowered or delayed.
WHAT TO DO: Tax professionals recommend that you devote several hours each month to bringing your files up to date, perhaps when you reconcile your checkbooks and bank statements. Go through that clutter of checks, receipts and whatever else might help you to uncover all your deductions and to determine the correct amounts of income items.
Your record-keeping system should be well-organized, but need not be elaborate. You may well be able to make do with one of those lined sheets that accountants use, on which you enter column headings that reflect your particular tax-deductible spending and income sources. Under the appropriate worksheet column heading, enter the details for each item. They would include the check number, date, payee and any other information that you think might be helpful later.
Consider these possible entries. Do you volunteer to help raise money or to perform other chores for religious, educational or charitable organizations? Remember to keep track of unreimbursed out-of-pocket expenses, including transportation, telephone calls and the cost of uniforms. These outlays are commonly missed.
The reward for your record-keeping efforts comes at tax time. The annual reckoning will be less time consuming, whether you do the job yourself or use a paid preparer, as well as less costly if you turn the task over to someone else.
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