If you tend to put off doing your taxes, you’re not the only one. In fact, as many as 33% of Americans wait until the last minute to file their taxes. But just because it’s a common habit doesn’t mean it’s a good one to have. Doing your taxes well before the deadline can allow you to engage in more strategic planning and prepare a more accurate tax return.
But the process of filing taxes can be daunting. There are a lot of details, caveats, rules, and regulations many people don’t know about or don’t feel comfortable learning on their own. The good news is there are tools and professionals to help with the tax filing process so it doesn’t have to be so intimidating.
Whether you consult a tax professional or file on your own, you can take steps now to prepare for tax season. Getting organized is half the battle, and it doesn’t have to be difficult. Get a head start this year with these tips on how to prepare for tax season.
Start by Gathering These Documents and Data
Filing your taxes—or getting organized and prepared to file them, for that matter—doesn’t have to be a chaotic, stressful process. Avoiding the chaos starts with gathering all the documents you or your tax preparer will need to file your taxes. Start by setting aside a specific time for finding and organizing the following information:
- Personal information: You probably know your own Social Security number, but if you’re married or have dependents, you’ll need their information as well. (And if you need to double-check anyone’s birthdates, you’ll need those, too.)
- Income documentation: Gather all documents that record your earnings for the year. The most common documents you’ll need are W-2s or 1099s. If you’re employed, you should receive a W-2 by January 31st. If you receive income from contract work, investments, or dividends, you’ll see your earnings reflected in corresponding 1099 forms, which you should also receive by January 31st.
- Deduction documentation: Deductions reduce your taxable income, helping to lower the tax you’ll need to pay. If you itemize deductions instead of taking the standard deduction, you’ll need documentation showing these expenses. Common examples include business expenses, property taxes, charitable contributions, and mortgage interest. Consult the IRS’s list of deductions and organize records for these expenses.
- Tax credit documentation: Tax credits directly reduce your tax bill. Like you did for itemized deductions, consult the IRS’s list of credits and find corresponding documentation for these credits. Common examples include Child and Dependent Care Credits, Saver’s Credits, and Health Coverage Tax Credits.
- Payment records for quarterly estimated payments: If you’ve been making quarterly estimated tax payments, you’ll need records of the payments you’ve made. Quarterly payments are required of anyone who expects to owe more than $1,000 in tax. Contract workers and self-employed individuals who don’t have taxes withheld usually have to make quarterly payments on their own. W-2 employees typically have their taxes withheld from each paycheck.
- Direct deposit information: If you expect a refund, direct deposit is the fastest way to get it. You’ll need your account information if you want to receive your refund through direct deposit.
Ask Your CPA These Questions
Once you’ve gathered and organized the records you need, you’ve done a lot of the work. Next, you’ll want to reach out to your CPA or tax professional to make sure you’re on the same page.
As you can imagine, tax professionals are busy during the first few months of the year, especially as the filing deadline approaches. By gathering your tax-related documents and reaching out to your CPA early, you’ll make both your lives easier (and likely receive faster service). Here are some questions to ask when you reach out to your CPA or tax professional:
- What information and documentation do you need?
- Is there anything I can do to reduce my tax bill at the end of the year—or to avoid paying too much throughout the year next year?
- How does my new life situation affect my tax return?
1. What information and documentation do you need?
If you’ve completed the steps above, you probably have most of this information ready. But it’s always helpful to ask your tax professional exactly what they need so you have time to gather any documents or records you overlooked.
2. Is there anything I can do to reduce my tax bill at the end of the year—or to avoid paying too much throughout the year next year?
If you expect to owe quite a bit in taxes—or if you expect a large refund—ask for guidance in making sure you’re paying the right amount of taxes throughout the year. Your accountant may be able to help you identify ways to avoid either end of the spectrum, whether that’s helping you make more accurate estimated payments or suggesting adjustments to your withholding.
3. How does my new life situation affect my tax return?
If you got married or divorced, received an inheritance, had a baby, or experienced any other major life change, you can expect these changes to affect your tax situation. Ask your accountant what these implications are so there are no surprises when you file—and so you can adjust your tax planning as needed.
Check Your Account Balances and Contributions
With your information in hand and guidance from your tax professional, it’s time to take the few last steps to prepare yourself for tax season.
- If you think you’ll owe taxes this year, start saving for them now. (If you’re self-employed, you should be setting aside a portion of your income throughout the year.) If you’ve already been doing so, keep that money set aside for this purpose and consult with your tax professional to prepare for exactly how much you’ll owe.
- If you have a Flexible Spending Account (FSA), the money you contribute usually doesn’t roll over to the next year. But as part of the Covid-19 relief bill, the rules are different this year. Anything you contributed in 2021 will still be available for you to spend through the end of 2022. This means you don’t need to rush to spend your account balance this year, but you should still plan accordingly.
- If possible, max out contributions to your retirement accounts to decrease your taxable income. Review contributions you’ve made to any traditional IRA accounts. Unlike your 401(k), you can continue making contributions to these accounts for the 2021 tax year until the tax filing deadline in April.
- If you have an HSA, consider maxing out your Health Savings Account (HSA) contributions. HSAs have a triple tax advantage, and they can be a fantastic savings vehicle for both healthcare and retirement. Similar to an IRA, you have until the tax filing deadline in April to make contributions to your HSA for the previous tax year. Review your contributions thus far and max them out if possible.
Ultimately, your tax professional or financial advisor may be able to help you develop the strategies most optimal for your situation. For example, if you can’t afford to max out both your IRA and your HSA, but you’re having a baby the next year, you may want to consider contributing more to your HSA than your IRA. A professional who knows your situation can give you tailored advice for your specific circumstances.
Work With Caviness Wealth to Prepare for Tax Season
While achieving your financial goals is a satisfying part of life, tax season can feel nothing short of overwhelming. But by planning ahead to get all of your tax-related materials, questions, and strategies in order, tax season doesn’t have to be a headache. In fact, it can be an opportunity to make even more progress toward your goals.
At Caviness Wealth Management, we can help you figure out how your tax strategy fits into your overall financial plan so that every decision you make is aligned with your goals for the future. To see if we can help you prepare for tax season with less stress and more strategy, click here to schedule a conversation today.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
