How to Prepare for Next Tax Season
From rushing to collect documents and filling out numerous forms to paying Uncle Sam your dues, the entire process is frustrating. Still, paying taxes is inevitable, and we all must file taxes each year. More than two centuries ago, Ben Franklin put it well when he said, "nothing is certain except death and taxes."
The sooner you get started, the better prepared you'll be for tax season. Planning ahead will make the process less stressful. It'll help you file accurate returns and avoid processing delays that can slow your tax refund.
As this tax season comes to an end, it may be good to ask how prepared you are. Here are a few tips to get you started.
Gather Personal Information
Gathering personal information is the first and perhaps most obvious step when filing your returns. The most pertinent information you should collect is for yourself and your family. You'll need the birth dates and social security information of yourself, your spouse, and any dependents.
Organize Your Paperwork
It is nearly impossible to file your tax accurately if you don't have important financial information at your disposal. For instance, you may soon start receiving paperwork from your employer and other financial accounts under your name. Note and securely save every tax form that arrives in your mailbox.
Unfortunately, organizing your income information is often overwhelming. Still, you must ensure all critical documents are ready before you begin filing. Doing this will prevent errors and enable you to take advantage of every eligible deduction. You may need the following documents and information:
Previous year's tax returns
W-2 employer forms
1099 forms from banks, issuing agencies, and other papers
Other relevant tax forms showing income earned
Records of mortgage interest and property taxes paid
Records of charitable contributions
Other income information you may want to collect includes alimony, investment income, social security benefits, individual retirement account, rental property income and expenses, and miscellaneous income (scholarships, earnings from the gig economy, gambling winnings, and jury duty, among others).
Adjustments to Your Income
Taxes frequently consume a massive chunk of your earnings. You should take advantage of every possible opportunity to reduce your taxable income. Collecting income adjustment documents will help you achieve this goal. Some adjustments to your income include:
Medical savings account
Student loan interest
Self-employed pension plans
Having the information above will contribute immensely to lowering your tax burden and increasing the size of your refund check.
Consider Credits and Deductions
Besides income adjustments, the IRS offers many tax credits and deductions you can claim. Therefore, it is in your best interest to start exploring credits and deductions entitled to you early, so you have an idea of which ones will help save money.
Deductions reduce the amount of income before you can calculate your owed taxes, while credits reduce the amount of tax you owe or increase your tax refund. In addition, some tax credits may give you a refund, even if you don't owe any tax. Credits and deductions for individuals can fall under any of the following categories:
Family and dependent
Income and savings
Looking for these credits and deductions is important for all taxpayers. However, not many people do this because of limited knowledge or the additional paperwork involved. This is where you should consider consulting a professional financial advisor to ensure you don't pay more than you owe.
Consider Consulting a Professional
A significant number of American households file their own returns. The do-it-yourself approach to filing taxes may feel more comfortable for many, (mainly because they have a more straightforward tax situation), making the process simple.
Others seek professional help, especially when navigating complex tax forms while lacking the patience to gather the necessary documents to prepare for filing. Please note that your tax situation becomes more complex as your financial situation grows. It would be best if you considered working with an experienced accountant during the tax season to help you:
Gather the correct financial and tax data from your incomes and investments
Identify and make good use of any deductions or credits you qualify for
Prepare your income tax returns
Offer expert advice tailored to your financial situation
Furthermore, a financial advisor can provide you with income tax projects, including estimated quarterly payments, which help reduce the risk of unwanted surprises, especially if you have multiple sources of income or your tax situation changes. Essentially, the advisor will play a critical role in helping you optimize your tax strategy.
Consider How You'll File Returns
After computing your income, chances are you'll end up owing Uncle Sam and you need a plan on how you'll pay your dues. For example, writing a check may be the easiest option if you have cash at your disposal and don't want to drain your savings and emergency funds.
However, if you have a huge tax bill and insufficient cash, you may want to start exploring options for additional sources of liquidity early. For example, you may consider selling securities or sourcing funds in your portfolio to raise enough cash for your tax bill. Again, your financial advisor can help you develop a more sensible financial plan for settling your tax bill.
If you've filed taxes before, you understand that it involves a lot of work - it's a headache for most. However, enough preparation can save you time and money. Use the tips above to make the forthcoming tax season less stressful.
If you need help getting ready for next tax season, or have questions about taxes in general, feel free to click the button below to get in touch with the Revonary Team.