As the new year draws nearer, it means that tax time is also on the horizon. While many people assume that you don’t need to prepare in advance, getting ready now has benefits. It lets you ensure that you can gather all of the information you need and make certain critical choices, simplifying your filing when the time arrives. If you want to get prepared for tax season, here are some tips that can help.
Decide How You Want to File
One step that you likely want to take now is deciding how you want to file. That way, you can make arrangements in advance, if necessary, ensuring you can use your method of choice.
If your taxes are straightforward, using online tax software and e-filing could be your best bet. Many online solutions are easy to use and can handle most basic tax situations, allowing you to tackle the paperwork confidently. For those with simple taxes that fall within the income limits, you may even be able to handle your filing using an online service for free, which is a boon.
If your tax situation is inherently complex or changed significantly during 2021, then you may want help from a professional. In that case, you’ll want to start researching your options immediately. Many CPAs or similar tax professionals have limited room in their schedules during tax season. As a result, you want to be able to make arrangements early, ensuring you can secure a spot.
Start Gathering Documents
While many tax documents won’t become available until after the start of 2022, there are some that you can start pulling together now. For example, if you have business or healthcare expenses that might be deductible, get your receipts and other associated records gathered now. That way, you can get a jump start on your tax preparations, ensuring you aren’t scrambling when it’s time to file.
You may also want to review your income records. If you have pay stubs, paid invoices, or similar documents available, get them together. The same goes for any quarterly tax payments you’ve made throughout the year if you’re self-employed or earn income from a similar arrangement. That way, you can use the information to estimate what you owe in comparison to what’s been withheld or paid. Not only does that decrease the likelihood of a surprise sizable tax bill when you file, but it also gives you a chance to pay what you owe now instead of risking penalties for being behind.
Check Out Available Tax Breaks
There are many scenarios that can make someone eligible for a tax break. Along with business and healthcare expenses – as discussed above – charitable donations, having a home office, using your car for work, or other situations may lead to deductions or credits.
Spend some time exploring the various tax breaks. That way, you can see if you’re accidentally overlooking an opportunity to save that you’re allowed to seize and will have time to pull together any information you need to claim it when filing.
Learn How Life-Changing Events May Impact Your Taxes
Certain life-changing events can have a significant impact on your taxes, causing what you owe to change dramatically in comparison to the previous tax year. Getting married or divorced both fall in the category, as well as adding or losing a dependent.
Buying a house, going to college, or losing a job also alter your taxes. The same goes for retiring from the workforce and tapping your retirement accounts. In some cases, certain health-related changes – such as going blind – may impact what you owe. The same goes for being affected by a natural disaster.
Usually, it’s best to consider all of the life-changing events you experienced during 2021. That way, you can look into how they may affect your taxes when you file, ensuring you’re ready for the impact in advance.
Review Your Stimulus and Advanced Child Tax Credit Payments
In 2021, some unique events occurred that may impact your taxes when you file. First, a stimulus payment went out in March. If you received one, you’d simply note that when filing. However, if you didn’t, you may qualify based on your 2021 return. As a result, it’s critical to check and confirm if you received a payment to ensure you can note that when filing.
Similarly, taxpayers that received advanced child tax credits will need to review what they received during 2021. That way, it can be appropriately represented on your taxes. While the IRS will send out notifications, like in January 2022, it’s best to research the situation ahead of time. That way, if there’s a chance that you were overpaid, you can prepare for that.
Max Out Retirement and HSA Contributions
Mazing out your retirement contributions is a smart move as the year draws to a close. If you’re adding money to a tax-deferred account, you’ll also reduce your taxable income for this year, lowering your tax bill for 2021.
The contribution limits for 2021 are $19,500 for 401(k)s and $6,000 for IRAs. However, those who are eligible for catch-up contributions can add another $6,500 and $1,000, respectively, so keep that in mind.
It could also be wise to contribute more to your health savings account (HSA) if you have a high-deductible plan. With those, you can deduct the contributions when you file your taxes, as well as secure tax-free earnings and withdrawals if you use the money for qualifying health-related expenses.
Do you have any tips that can help someone get ready for tax season? Do you feel prepared for the upcoming tax season, or do you wish that you had more time? Share your thoughts in the comments below.
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Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is an AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals.