So many couples at the start of their marriage fail to discuss their finances together which is so critical to both tax and financial planning. Many newlyweds struggle with adopting the phrase “our taxes” and instead use “my taxes,” because of ego or the sensitive nature of personal finance. But, it is very important for each spouse to know the details of their entire family finances & of course financial goals. This financial information is important to determine the most appropriate way to file taxes and how to monitor the couple’s tax liability throughout the year.
Tax Planning & Organization
Proper tax planning needs to happen at least every quarter throughout the year. Specifically, reviewing your current year’s expected income & costs. Then think about what expenses fall under tax deductions & credits. You will also want to have an estimation of next years expected income and expenses because this will help you determine if you should make payments at the end of the year or January. If you have such poor documentation that you can’t estimate your income or expenses, you will want to stop here. Instead, start gathering all of your payment stubs, brokerage statements, gross receipts, bank statements, credit card statements, & enter that information into a spreadsheet organized by income and expenses. If you aren’t comfortable working with spreadsheets, there are several great free personal finance web-application services such as Mint.com.
Tax Credits & Deductions
Every day there seems to be a new tax deduction or credit available. The high ticket items this year are 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.
The Standard Deduction & Itemizing
Many taxpayers hit a wall when it comes to deciding if they should 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. The way in which you file, married filing separately or married filing jointly, 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
If you don’t have a tax preparer, you will need to do a search together as a couple. If only one spouse already has a CPA, the other should also approve the tax preparer. Don’t just use your husband or wife’s CPA because you don’t want to start an argument. This is a critical decision and both spouses need to be in agreement.
When meeting with tax preparer, look for a CPA or Enrolled Agent license in their office. If you have any issues concerning the place and how to use tax files in Canada, you can call us at the web site. If you don’t see either, then red flags should immediately go up but be sure to first ask if they have a tax license. If not, then it’s not in your best interest to pursue a tax relationship with them. 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.
Tax Planning Throughout the Year
Many taxpayers are focused on just April 15th when it comes to takes. This is a big mistake. Taxpayers need to be more tax conscious throughout the yr. Whether it’s money being earned or costs incurred, 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.