Preparing and filing your taxes may not be your favorite activity, that’s why it can be easy to put it off until the last minute. But if you don’t want to get any penalties for the upcoming tax season, taking the time to plan ahead can make the process easier.
To save yourself from the headache of rushing through your paperwork, here are a few steps you can do to get ahead for tax season.
What is tax season?
Tax season is a period of the year when taxpaying individuals start their preparation and filing of last year’s tax returns. It usually falls at the beginning of January and ends in the middle of April.
Although you may think that 3 months is a sufficient time to get your documents ready, it’s always a good idea to start your preparations as early as possible especially when you don’t have your financial records organized. Otherwise, tax returns filed after the deadline will be subject to late penalty fees added on top of the tax amount you’ll need to pay.
How can I prepare for tax season?
If you want to get the most out of the upcoming tax season, the key is to come up with a smart strategy to help you file on time:
1. Update your personal information
It may seem like an insignificant detail, but updating your personal information is necessary if you’ve recently moved to a different address, legally changed your name, or got married or divorced. Since you’ll have to notify the Internal Revenue Service (IRS) and Social Security Administration of these changes, it’s good to have this step out of the way as soon as possible.
When filing your tax returns, you’ll also have to gather the birth dates and Social Security numbers of your spouse and dependents. So it’s better to note them down early to avoid any errors later.
2. Organize your tax documents
Your tax records may be the most crucial part of filing your tax return, that’s why it’s important to have them ready ahead of time. Having them organized can not only make the process easier, but you can also review if you have any missed credits or deductions.
To complete your documents, here are a few of the records you’ll need:
- Form W-2 from your employer
- Forms 1099 from banks and other issuing agencies
- Form 1095-A or Health Insurance Marketplace Statment
- Letter 6419 or Total Advance Child Tax Credit Payments
- Letter 6475 or your Economic Impact Payment
- Records of virtual currency income or transactions
3. Maximize your contributions
Before the next tax season starts, you might want to consider depositing a few funds into your contributions since this will help you lower your taxed income, and in turn, increase your tax refund or reduce your owed taxes.
Your Individual Retirement Account (IRA) will allow a contribution of a maximum of $6,500 for 2023, while $7,500 for taxpayers that are 50 years old and above. Your Health Saving Account (HSA) and your 401k plan are also excellent accounts to invest in.
4. Modify your tax withholdings
Adjusting your tax withholdings every year is always a good idea since this will reflect the tax amount that will be withheld from your paycheck. If you’ve had any significant life changes in the past year, like having a baby, getting married or divorced, or getting a second job, it will be smart to change your withholding.
You might want to avoid having any owed taxes or else you’ll be subject to receiving a tax bill. To let you know the approximate amount of tax you should be withholding, the IRS has an online tax withholding estimator that you can use.
5. Consider your tax credits
If you need help with reducing your taxes, the IRS has a number of tax credits that you might qualify to claim. For instance, the Earned Income Tax Credit (EITC) can help low to moderate-income taxpayers or families get a tax benefit, that they can use the credit to lessen their owed taxes or increase their tax refund.
Each tax credit will have its own requirements and qualifications, so make sure to check if you qualify to apply for one.
6. Decide whether you’ll need an extension
If you think you can’t file your tax return on time despite all of your planning, it’s wise to request an extension in advance. The IRS will accept your appeal as long as you have a valid reason, but you’ll still need to pay your taxes and any owed amount by April to avoid receiving a late penalty fee.
Do you need help preparing your taxes?
If the process of preparing and filing your tax returns is overwhelming, you can always work with a trusted accountant to do it for you. Lear & Pannepacker has a team of professionals that are ready to manage your account, so contact them today to learn more about their services.