So many couples in the beginning of their marriage fail to have a financial discussion which is so critical to financial planning AND taxes. They struggle with adopting the term “our taxes” and instead use “my taxes,” because of ego or the sensitive nature of finances. But, it is critical for each spouse to know the others income, expenses, investments, benefits, & of course financial goals. All of these elements are important to determine the best way to file taxes and how to monitor your tax liability throughout the year.
Planning & Organizing Supporting Tax Documentation
First and foremost, proper planning needs to happen now, although it should be something that is reviewed at least every quarter throughout the year. You will want to review your current year’s expected income & expenses and then think about what expenses fall under tax deductions & credits. If you can, you will also want to have an estimation of next years expected income and expenses because this will help you determine if you want to make payments at the end of the year or January. If you have such poor documentation that you can’t properly estimate either your income or expenses, you will want to stop here as you aren’t even ready to think about taxes. Instead, start gathering all of your payment stubs, brokerage statements, receipts, bank statements, credit card statements, & enter that information into a spreadsheet organized by expenses and income. If you aren’t comfortable working with spreadsheets, there are several great free personal finance web-application services such as Mint.com & Justthrive.com.
Tax Credits & Deductions!
It seems as though every day there is a new tax deduction or credit available and keeping track of it all can be quite overwhelming. The notable items this year are the homebuyer tax credit, the energy tax credit for homes, the American Opportunity credit for college students among others. As for deductions, mortgage interest & state income taxes are usually the biggest ticket items and to a lesser degree medical expenses that exceed 7.5% of AGI (Adjusted Gross Income), and any charitable donations & miscellaneous expenses.
To Itemize or Take the Standard Deduction?
A classic question that always arises is should we itemize deductions or use the standard deduction which is $11,400 for married filing jointly. The general guidance which may seem obvious is to claim the deduction that is larger. If you have a lot of mortgage interest then itemizing may make sense. How you file – married filing separately or married filing joint also matters. If you are married filing separately, then you have no choice but to itemize deductions if your spouse does.
Choosing a Tax Preparer & Knowing What to Ask
If you don’t already have a tax preparer, you will need to do a search but make sure you reach an agreement on a preparer as a couple. If one spouse already has a CPA & the other doesn’t, the one that doesn’t should also feel comfortable with the preparer. Don’t just pick the CPA that your husband or wife already uses because you don’t want to be confrontational. This is an important decision that both spouses should be comfortable with. When you first meet the tax preparer, look for a CPA or Enrolled Agent license in their office. If you don’t see either, then red flags should immediately go up but be sure to first ask if they have a tax or accounting license. If they don’t, then it’s not in your best interest to use them for any type of tax work. If they do, jot down their license number so that you can verify them later on AICPA List of State Boards of Accountancy if they are CPAs and or the National Association of Enrolled Agents or contact the IRS if they are enrolled agents.
Also, it is a bad sign if the preparer isn’t asking any of these types of questions during the meeting.
1) Who were your previous tax preparers and why are you no longer using them?
2) What type of income and expenses do you normally report?
3) Are there any previous tax liens against you?
4) How is your credit report?
5) Do you invest capital in any businesses?
6) Do you have a family with children & how many homes do you have?
7) When do you plan on retirement and what is currently included in your estate?
Just as you are evaluating the tax preparer, they should be evaluating you to reduce the risk of any issues with the tax return.
Taxes Should Be a Concern Throughout the Year
Many taxpayers are fixated on April 15th for paying their taxes. Big mistake! Taxpayers need to be more tax conscious throughout the yr. Whether it’s money being earned or spent, the household needs to be aware of the tax consequences for each. For instance, the decision to pay a bill this year or next year can result in tax savings & more money in your pocket. A specific example would be if paying medical expenses before the end of the year will get you above 7.5% of AGI and you are itemizing.
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