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6 model behaviors for tax planning season

(BPT) – Each tax season, much is written about strategies to minimize the amount you pay to Uncle Sam. Less focus is usually given to behaviors or practices that better position you to navigate tax season.

With that in mind, Robert Fishbein, a vice president in Prudential’s Tax Department, offers six such practices that can help ensure your tax season goes smoothly and you pay only what you owe.

* Keep good records. Regardless of whether you use a shoe box or an Excel spread sheet, keeping good records is a model behavior in preparation for tax season. Your records are the support for your various tax positions, such as your business and charitable deductions. Without good records to support your tax positions, you are vulnerable to audit risk – even if you have a legitimate tax position.

The best practice is to start a new folder at the beginning of each year and to make sure you put all tax-related documents into the folder as transactions occur. Made a charitable gift? Sold some stock? Keeping these documents in a folder will remind you about what you need to include on your tax return and serves as a check on tax reporting you receive at year-end.

Of course, for things like business expenses, there is no such tax reporting, so good record-keeping can be the difference between being allowed a legitimate deduction and losing it for want of sufficient support.

* Use tax preparation software. There are several tax software programs that make it easy for you to prepare your return. Typically, the software asks you questions to make sure you’re including all income and benefiting from all deductions and credits. Using the program will help you avoid calculation errors and ensure that you comply with all relevant tax law provisions.

* File electronically/use direct deposit. E-filing, or direct electronic filing with the IRS, is available when you use tax preparation software. It will speed the processing of your return. Direct deposit, or direct payment of a refund by the IRS to your bank account, also shortens the process. Even if you owe money, filing electronically is still preferable because it’s the best way to ensure delivery, with confirmation, of your return.

You can file your tax return as soon as it’s completed and make the payment closer to the due date. You can pay by setting up an automatic debit from your bank account, or mailing a check, on or before the due date.

* File as early as possible. The IRS started accepting tax returns for processing on Jan. 20. In prior years, earlier electronically filed returns requesting direct deposit of a refund received the associated tax refund in around 10 days. As you get closer to April 15, the period for receiving a refund increases. Filing early is not as important if you are not getting a tax refund.

* Know when to ask for an extension. If you will not have the information you need to file your tax return on or by the due date, file IRS Form 4868 for an automatic six-month filing extension. You can be in this position when you are an investor in real estate, a limited partnership or other business and you won’t get the related information returns before you are required to file your return.

Remember, receiving the permission to file your tax return later is not permission to pay late or not in full. You still must estimate your tax liability and pay the full amount on or before the original due date of your return. If you fail to estimate correctly, you can be charged interest and possibly penalties.

* Know whether to use a tax professional. Using a professional preparer can pay for itself in terms of deductions or other tax benefits the professional may find for you. Even if he or she doesn’t find savings, a tax professional is better positioned to make recommendations and planning suggestions for future savings. Also, there’s comfort in knowing that a professional has reviewed your return and is comfortable you are taking appropriate tax positions.

More complex tax returns almost certainly warrant the technical expertise of a tax professional. Consider a tax preparer if, for example:

– You have income beyond W-2, interest income and dividend income.

– You have your own business.

– You moved during the year (especially if you moved to a new state).

– You work in multiple states and have to file an income tax return in more than one state.

– You are subject to the alternative minimum tax.

– You are subject to the 3.8 percent tax on investment income.

By practicing the above model behaviors year-round, you can better ensure that your tax season goes smoothly and you will keep more of your money for yourself and your family.

Looking for more content from Robert Fishbein? Read “Life-Cycle Financial Planning” at http://www.prudential.com/view/page/public/31236.

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