Many of us dread this time of year -- tax time. There’s paperwork, and, of course, you might owe to the .
But if you face your fears and move quickly, you may even be able to squeeze in one lastfor 2012 and shrink your tax bill a bit.
How do you get that deduction? I'll get to that in a moment.
But first, I want to emphasize the importance of acting now. Even though we acknowledge that tax time pretty much begins with the New Year, it’s easy to think that there is plenty of time before April 15. Don’t make this mistake.
If you don't want to be scrambling at the last minute, now is the time to start preparing to file your taxes -- even if you decide not to take care of the paperwork for weeks yet.
Here are four ways planning ahead can get you in the right position for tax-day success.
1. Organize Your Tax Documents
The longer you wait to organize your tax documents, the greater the likelihood that youoverlook something in a last-minute frenzy. Look through your documents now and make sure you have what you need. If you notice something missing, you'll have time to track it down.
If you still find yourself scrambling to assemble your documents, consider filing for an extension. This IRS still expects you to pay your taxes by April 15, even if you aren't filing your paperwork.provide you with six extra months. Realize, though, that the
2. Make An Appointment With Your
This is a busy time for tax professionals, so call your accountant early in the season to schedule your appointment. Schedule your appointment for late February or early March. This gives you time to organize your documents, while still providing some leeway if something turns up missing.
While you have your accountant on the phone, find out if there are filing delays likely to apply to your situation.
3. Understand Your
Cost basis is one of the most important concepts for investors to understand. Your cost basis is the amount you paid originally to buy shares, and it's used to determine your gain or loss when you sell.
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Starting in 2011, the IRS began requiring brokerages to report cost basis, making it especially important that you have it right. You need to understand which cost basis method is used with your shares -- particularly with mutual fund shares. Your three options for cost basis are:
- Average cost: An average of the price paid for all of your shares is taken, and that number is used in determining your "cost" at the time of purchase.
- FIFO: "First in, first out" is fairly straightforward. The first shares you bought are considered the first that you sell, so whatever price you bought the shares at is your cost basis.
- Versus purchase (or, specific selection): You pick which shares you want to sell for deciding your cost basis. However, those without very good records of their transactions shouldn't attempt this method.
Find out which cost basis method your brokerage is using so that you are on the same page. Going forward (since tax year 2011), your cost basis should be listed on your reports, but it might not be the case for your older transactions. You might need to search your records to find this information.
If you aren't sure, contact the brokerage. In many cases, average cost is the safest way to go if you don't know.
4. Contribute To AnOr
You still have time to contribute to tax-advantaged IRA or to a Health any time before April 15. If you haven't maxed out your available contributions, consider this tax move to reduce your .accounts. You can make a previous-year contribution to a Traditional
Reducing your income with the help of a to an IRA or HSA might keep you in a lower tax bracket and it might improve your eligibility for other itemized deductions that come with income limitations. This is another reason to consider meeting with an accountant well before April 15; he or she can run alternate scenarios to see whether additional contributions can make a difference.
When you contribute to an IRA or HSA, be clear about the year to which yourshould apply. You can't deduct the same for two different years.
The tax liability. Meet with your accountant and determine the best way to proceed -- including the possibility of making a previous year contribution to your Traditional IRA or HSA.Answer: The earlier you prepare for April 15, the better. You'll have more time to gather documents and test out different reporting strategies for reducing your