Tax season may feel far away, but starting early can help streamline the process and reduce stress when deadlines approach. By organizing your financial information and planning ahead, you can identify opportunities to align your tax strategy with your overall financial goals. In this article, we’ll discuss tax season preparation and share some early moves to consider as you prepare for tax season this year.
- Organize Your Financial Documents
Gathering your financial documents early can help you avoid last-minute scrambling. Essential documents may include:
- W-2s or 1099 forms to report income.
- Statements for investment accounts, retirement plans, and health savings accounts.
- Records of charitable donations or deductible expenses.
- Receipts for major purchases that may qualify for tax deductions or credits.
- If you’ve made changes to your financial situation this year—such as selling a property, starting a new job, or adjusting your investment portfolio—make sure to collect the necessary documentation to reflect those changes.
- Review Your Withholding and Estimated Tax Payments
It’s a good idea to review your tax withholding or estimated tax payments well before the end of the year. If you’ve experienced significant life changes, such as a marriage, divorce, or the birth of a child, these events could affect your tax liability. Adjusting your withholding now can help you avoid overpaying or underpaying taxes.
For those who pay estimated taxes, check whether your payments are on track to meet your expected liability. This can help you avoid potential penalties for underpayment.
- Evaluate Contributions to Tax-Advantaged Accounts
Tax-advantaged accounts, such as 401(k)s, IRAs, and health savings accounts (HSAs), offer potential benefits when it comes to tax planning. As the year progresses, consider whether you are on track to meet your contribution goals for these accounts:
- 401(k) and IRA Contributions: Contributions to traditional accounts may reduce taxable income, while Roth accounts provide potential for tax-free growth.
- HSA Contributions: If you’re eligible, contributing to an HSA can provide tax benefits for qualified medical expenses.
By contributing as much as possible before deadlines, you can align your retirement and healthcare savings goals with tax planning strategies.
- Track Potential Deductions and Credits
Deductions and credits can play a significant role in your tax liability, so it’s helpful to track eligible expenses throughout the year. Common areas to review include:
- Charitable donations, including cash contributions and donated goods.
- Medical expenses, if they exceed a certain percentage of your income.
- Education-related expenses, such as tuition payments or student loan interest.
Keep detailed records and receipts to substantiate these claims when filing your return.
- Consider Tax-Loss Harvesting
If you’ve experienced losses in your investment portfolio, tax-loss harvesting may help offset gains in other areas. By selling certain investments at a loss, you can potentially reduce taxable income while rebalancing your portfolio.
This approach requires careful planning to avoid wash sale rules, which could disqualify the tax benefits. Consulting with a financial professional can help ensure the process aligns with your overall investment and tax strategies.
- Understand Changes to Tax Laws
Tax laws can change from year to year, so part of tax season preparation is staying informed about updates. For example, new legislation may affect contribution limits, tax brackets, or deductions and credits.
This year, be aware of any updates stemming from the SECURE Act 2.0, which introduced changes to retirement account rules, or other legislation that could impact your tax strategy.
- Review Your Business Finances (If Applicable)
For small business owners or self-employed individuals, tax planning involves additional considerations. Some steps to take include:
- Reviewing eligible business deductions, such as home office expenses or equipment purchases.
- Ensuring proper record-keeping for income and expenses.
- Evaluating whether quarterly estimated tax payments align with your earnings.
Working with a tax professional can help you identify opportunities specific to your business structure.
- Plan for Required Minimum Distributions (RMDs)
If you’re required to take RMDs from tax-deferred accounts, make sure to incorporate them into your tax strategy. The timing and amount of these distributions can affect your taxable income, so it’s important to plan accordingly.
Recent updates to RMD rules, including changes to the starting age, may also influence how you approach these withdrawals.
- Check Your Tax Filing Status
Your tax filing status can significantly impact your tax liability. If your circumstances have changed—such as getting married or separated—it’s essential to understand how these changes affect your filing options during tax season preparation. Choosing the most appropriate status for your situation can help ensure accurate reporting.
- Schedule Time with a Financial Professional
Tax planning is a year-round effort, and working with a financial professional can help you navigate the complexities of the tax code while aligning your strategy with your financial goals. They can provide personalized guidance on topics like deductions, credits, and tax-advantaged savings.
By starting early and addressing these areas proactively, you can approach tax season with greater clarity and confidence. Taking small, strategic steps now can make a big difference when it’s time to file.
Tax Season Preparation: Are You Planning Ahead?
Tax season preparation doesn’t have to be overwhelming. By organizing your financial documents, evaluating your tax strategy, and staying informed about potential changes, you can create a more efficient and informed approach to managing your taxes. Begin today to work towards a process that is more in line with your overall financial objectives.
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Bob has a passion for making your money work hard for you. He takes profound joy in ironing out a plan for a long and comfortable retirement, no matter what your current income or level of wealth. With a work ethic second to none, he has a zeal for transforming uncertainty into stable ways for you to protect your future and your family. He knows that the quality of your life you enjoy today can remain as rewarding—or even better—after retirement.
With a strong background in information technology, Carol is instrumental in building operational policies and strategies that keep the organization functioning smoothly. Carol’s organizational skills and her flexibility to jump from priority to priority along with her commitment to customer service makes her an essential part of the Grimard Financial team. When Carol is not working with the Grimard Financial Family, she is a very creative and accomplished photographer.