Tax planning is not always something we look forward to, but it’s often the time investment that can spare us stress and undesirable outcomes in the future. With a little bit of planning now, you can reduce your tax burden and save yourself hassles this filing season. And sometimes, the clarity gained through this process can even lead to a revitalized motivation and sense of control over your financial future. So, instead of procrastinating, get yourself ready for April now. And here are 7 simple ways to do it.
First, pick a system that works for you. Whether you are a digital or paper person, find a way to capture your spending. Either one is okay, just be honest with yourself about which method you can commit to. Much of your tax information centers around your expenses and how to categorize them. If it is still on paper, keep receipts in one place. Treat yourself to a cool looking decorative box or find a drawer, but get in the habit of making sure everything goes into that spot. For those wanting to track things on their smartphones, here are some great apps that allow you to capture and manage expenses:
Second, have a chat with your accountant. November through January are their slowest months and they would much rather help you before the deadlines- when you can actually do something about potential pitfalls. Here are a few things your CPA wishes you would do to maximize this annual prep meeting:
Third, review your withholdings. If your taxes are automatically withheld from your paycheck, this is a good time to make sure it’s the right amount. Look at the tax return you filed earlier this year. Was enough tax paid? Too much? Too little? For example, if you have had a significant shift in earnings and did not adjust your withholdings, you may be paying too much or not enough.
Fourth, prepare an income projection. If you did really well this year, chances are there will be increased taxes that go along with that increased income. Do a comparison to last year. If it looks substantial, talk to your tax preparer and discuss what you can do to prevent penalties.
Fifth, re-evaluate your retirement plan. Maybe you can use some of that hard-earned bonus to make an extra (tax-deferred) contribution to your retirement account and hit your max contribution before year end. Even just making small annual increases to your future contributions can have a big impact on your retirement position down the road- and you don’t really notice it when it’s small!
Sixth, make a charitable giving budget for the upcoming year. Review your past giving and decide which organizations make the most impact. Set a calendar for the upcoming year so that you aren’t just reacting to every fundraising campaign that comes your way throughout the year. Vet them out ahead of time and plan your giving. This way, you won’t exceed your budget and you’ll feel better about the money you do donate. Also, keep in mind that, for 2021, you can take a $300 above the line deduction for single filers and $600 for married filers (even if you don’t itemize) for cash donations to qualified charities.
Seventh, create an online account with the IRS. You will be able to track your refund, view your balance, create a payment plan if you owe and cannot pay, access your tax records including the tax return as well as the key data that was reported to the IRS, view any authorization requests from tax professionals, approve and electronically sign a Power of Attorney Information so that your tax professional can review your information and speak on your behalf, and verify the economic impact stimulus payments you received. Register Here.
Filing your taxes is probably never going to be something you look forward to or consider fun, but when you are proactive, it will put your mind at ease, reduce that nagging feeling of pressure, save you time, and avoid undesirable outcomes!