By Isabella Bartlett
Tax season can be stressful for taxpayers, which is why it is important for taxpayers to plan and stay proactive throughout the year to help reduce the stress of tax season. Proactive planning will help you minimize your tax liability. Here are a few tax planning tips to help you prepare for tax season:
Stay organized
It’s important that taxpayers stay organized throughout the year. It’s recommended that you keep all personal and any business tax files separate so when tax season arrives, you understand what you have and what you will need for each return. Keeping a record of any donations and contributions will help you decrease your taxable income.
Adjust your W-4 withholdings
It’s important to always pay close attention to the percentage of your income that your employer is withholding, especially if your income or tax situation may have changed. Not withholding enough may cause an unexpected tax bill when it is time to file. Withholding too much may leave you with less take-home pay throughout the year. At the beginning of the year, you should be checking your withholdings to ensure the appropriate amount is being deducted from your paycheck to cover your tax liability. An easy tool to check if you are withholding an appropriate amount is the IRS Tax Withholding Estimator on the IRS’ website.
Contribute to your retirement
A good way to decrease your adjusted gross income (AGI) is making contributions to retirement plans or traditional IRA accounts. Certain contributions made to a 401(k) plan, 403(b) plan, or a traditional IRA can be deducted from your AGI, which will then decrease your tax liability. It’s important to determine any changes in your contribution in early December, so you will see the advantages when it is time to file if you have increased your contributions.
Pay Estimated Tax Payments
If you have income that does not have tax withholdings, then it’s important to make quarterly estimated tax payments during the year. Ensuring you pay estimated tax payments on time helps avoid a hefty tax bill when it is time to file and helps you avoid penalties for underpayment of estimated tax. If you expect to owe more than $1,000 in federal income taxes, you should consider making estimated tax payments. These payments are based on your previous year’s tax bills, and the payments should be paid equally over the four quarters.
Tax-loss Harvesting
If you anticipate your capital gains to be high when it is time to file you may want to consider tax-loss harvesting by realizing capital losses to offset capital gains. This method allows you to sell investments for a loss, replace them with similar investments, and then offset realized investment gains. You are allowed to deduct losses from your capital income based on your filing status and the type of losses, whether short or long-term. Another advantage is that any loss not applied to your current year’s return can be carried forward to next year.
All in all, individuals should begin planning for their tax filings at the beginning of the season to ensure they are prepared. This may involve reviewing and adjusting withholdings, making estimated tax payments, contributing to retirement accounts, and maintaining organized records.
This information has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions on how to prepare for the tax season, please do not hesitate to contact us at Lear & Pannepacker.