Five Tips for Tax Season
Have you filed your tax return yet? If you're worried about preparing your taxes, use these tips to help get you ready for tax season.
In late January, employers and many other income sources are required to prepare and distribute various tax forms. Once these forms are received, nothing is stopping you from filing your taxes immediately. While this may sound like the last thing you want to do (taxes aren’t due until May, after all [for the year 2021]), this is an easy way to save headaches. Unfortunately, with tax time comes significant fraud. It is not unheard of for fraudsters to send in a tax return in your name in attempts to impersonate your tax return and intercept any potential refund. Filing early will help alleviate this risk because the IRS will already have your tax return on hand if any fraudulent returns are submitted. If you have already filed, the fraudsters have a distinct disadvantage when attempting to steal a refund.
Find a Qualified Tax Professional
Let's face it, taxes can be very complicated. Even those who spend their days looking at numbers can be overwhelmed with the endless rules and regulations that revolve around taxes. The importance of a tax professional to represent you cannot be understated. Not only are taxes burdensome, but you could be faced with serious consequences if they’re not completed correctly. Plus, someone experienced in taxes may be able to identify new deductions that could reduce your overall taxes. Depending on one's situation, hiring a professional may be best. Another option is to have a tax professional review your forms once they have been completed but before they have been filed. Depending on the aptitude of the individual, these options or anything in between may be best. Partnering with someone who lives and breathes taxes will likely pay off in the long run.
Evaluate Your Tax Situation Throughout the Year
Virtually no one wants to think about taxes at any point in the year. The fact that we are forced to think about it at all is often a significant bummer. While this is true, the real tragedy would be if a large tax bill decides to surprise us out of nowhere. I have often seen cases of individuals who forgot to have their employer withhold taxes on their paycheck or make a significant withdrawal from a tax-sheltered account like an IRA without realizing the potential consequences. These are just two examples of a possible considerable tax liability come the following April. To mitigate this, simply look at the tax withholding on your paystub, or evaluate the potential consequences of large withdrawals from retirement accounts if you are under retirement age. It is recommended that at least an early- and mid-year evaluation is completed. Take a look at what is being withdrawn and compare it to the expected taxes charged for the year. There are many calculators online that will help. If a discrepancy is caught early enough, corrections can be made to ease the blow of significant tax liability.
Contribute to Your 401(K) or IRA
An easy way to reduce your tax footprint over the year is to contribute to your retirement accounts. Money that is put into these accounts is not taxed until the funds are withdrawn. This means that the overall tax bill could be much lower if one saves throughout the year. Keep in mind, there are limitations to how much can be contributed (IRS.gov will have more details on rules) but contributing any amount will help come tax time. In addition to the potential tax break, saving for retirement is a great pursuit and, if done correctly, can yield many more rewards than tax savings. If you forgot to contribute for the previous year, don't worry! You can often contribute for the previous year up until the filing deadline.
Throughout the spring, various entities are required to provide tax information to everyone. This will include employers, lenders, colleges, brokerage firms and many more. For some, by the time filing occurs, they may have dozens of tax forms to consider. These forms must be kept and organized. When filing occurs, most of these forms are required to prepare a correct return. If a document is lost or forgotten, additional complications may emerge. Today, most companies will send forms electronically. It is easy to store all of these forms in a secure spot on a computer. If you prefer paper, print the documents and keep them together in a folder or filing cabinet until you are ready to file. In addition to this, keep your paperwork handy for a few years after filing. Often, the government will ask for information on these forms years later if you apply for government assistance like FAFSA. You will not regret storing this information in a safe place just if your future self needs it.