How to Prepare for Tax Season: Tax Planning Tips for the Year Ahead
Disclaimer: This blog is for informational purposes only. Please consult a licensed tax professional for guidance tailored to your individual circumstances.
Tax season is many people’s most dreaded time of year. You’ve probably found yourself scrambling to get everything in order and becoming overwhelmed in the process. But with the right preparation, filing your taxes can be much simpler, and you can save money in the process. Just like paying down debt and building better budgeting habits, preparing for tax season early sets you up for a solid financial future. Here are some tips to help you plan ahead for tax time:
Keep Your Documents Organized
One of the biggest hurdles during tax season is getting all of your documents together. Instead of digging through various accounts and folders to find all the documents you need right before it’s time to file, keep them organized in one folder ahead of time. Throughout the year, you can keep personal documents like Social Security cards and the previous year’s tax return in the folder. As you receive other documents, like W-2s, 1099s, and receipts, place them in the folder. If you organize your documents as you receive them, it will be less stressful come tax time.
Find Ways to Reduce Your Taxable Income
Essentially, your taxable income is your gross income minus any deductions. This is an important figure because it determines your tax bracket and the rate at which you’re taxed. If you can reduce your taxable income, you may be able to fall into a lower tax bracket, which could reduce the amount you owe in taxes for that year. There’s a long list of types of income that count toward your taxable income, including:
- Employee compensation (salaries, wages, tips, commissions, bonuses, etc.)
- Self-employment income
- Business income
- Investment income
- Government benefits (Social Security, unemployment, etc.)
Note that this is not an exhaustive list. For a full list of taxable income, visit the IRS website. There are several ways to reduce your taxable income, including claiming deductions and contributing to tax-advantaged accounts, like 401(k) plans, HSAs, and FSAs.
Don’t Miss Out on Deductions and Credits
Tax deductions and credits can help you pay less in taxes. Tax deductions reduce your taxable income, while tax credits can directly reduce the amount of taxes you owe. The key difference is that reducing your taxable income doesn’t automatically mean you’ll owe less in taxes, but qualifying for a tax credit typically does. When it comes to choosing between standard deductions and itemized deductions, it will depend on which one reduces your taxable income more. As far as credits, there are many that people may qualify for, including ones related to:
- Education
- Dependents
- Employment
- Business
- Clean energy (home or car)
- Health insurance
- Retirement
Figuring out tax deductions and credits can get tricky, so speaking with a tax professional or financial advisor can be helpful.
Check Your Paycheck Withholding
When you’re an employee, a specific amount of taxes is withheld from your paycheck. The amount withheld is based on how much you make and how much you instruct your employer to withhold on your W-4. The goal is to withhold an amount that’s close to your estimated income tax for the following year, so that you won’t owe a big chunk by the time tax season arrives. The tax withholding estimator tool on the IRS website can help you determine how much you should instruct your employer to withhold on your W-4.
Take Any Major Life Changes into Account
Major life events, including getting married, getting divorced, or gaining new dependents, can impact your filing status. Other events, like buying a home or changing your employment, can have an effect on other areas of your taxes. Keep life changes in mind as you prepare for tax season. Make sure to keep your documentation organized and up to date to reflect those changes, and take these life events into account as you plan how you will file.
Work With a Tax Professional or Financial Advisor
Taxes can get complicated, especially if you’re self-employed, have investments, or have other situations that make your taxes more complex. Every person’s situation is unique, and we can’t cover all of the possibilities here. If you’re feeling unsure about how to approach your taxes or you have questions about your unique circumstances, consider reaching out to a tax professional or financial advisor.
Preparing for tax season early can make filing easier and help uncover potential savings. Not only does staying proactive about your taxes make tax time less stressful, but it also helps you build healthier habits and set yourself up for a stronger financial future. AutoPayPlus is a financial concierge that helps people take control of their finances by setting them up on automated payment plans for their fixed monthly payments and can accelerate loan payoff with a bi-weekly payment plan. If you’re ready to learn how AutoPayPlus can help you reduce your debt faster and put you on the path to financial health, reach out to us today!
