The year is nearly over, and that means tax season is right around the corner. Your taxes are an important part of your personal finances, and taking time to prepare now can save you a lot of stress and hassle as April approaches.
Get a head start today and your tax prep and filing will be much simpler when tax season arrives.
1. Simplify your accounts
The most time-consuming part of preparing your taxes each year is organizing and entering your tax information from an array of accounts. If you have multiple savings accounts, investment accounts, and other financial accounts, consider simplifying and combining your accounts.
I used to have accounts at several banks, often with only a small balance deposited just to keep the account open. Once I realized there was no benefit in keeping inactive accounts, it cut down on the number of 1099 forms I needed during tax season and helped clear some mental clutter.
2. List out your expected tax forms
Each year in December, I make a list of every single tax form I’m expecting. Using an app like Google Keep makes it easy to stay organized, but a spreadsheet or text document works just as well if that’s simplest for you.
You can hypothetically file your taxes as early as January 1st. Electronic filing opens on January 23rd, 2017 for the 2016 filing year. However, you can’t actually file until you have received all of your final tax paperwork.
Employers have until January 31st to deliver your W-2. The 1099 forms you receive from banks, student lenders, and other financial institutions are usually due by February 1st, but investment companies have until February 16th to deliver 1099-B, 1099-S, and 1099-MISC forms.
It’s important to wait to file until you have every form. If you file early and miss something, you’ll have to file an amended tax return.
3. Create a tax form folder
I get tax forms both in the mail and electronically. Having easy access to all of my forms makes preparing my taxes much, much easier. To help me stay organized, I create two new folders every year for my tax forms.
The first is a physical folder labeled “2017 Taxes,” where I put all of the forms I get in the mail. Then, on my computer (usually in Dropbox so I can access it anywhere), I create a folder for PDF versions of forms I receive electronically.
4. Decide how you will do your taxes
Do you hire an accountant to take care of your taxes, or do you file yourself with a program like TurboTax, H&R Block, or TaxACT? This is the best time to decide your plan for your upcoming filing year.
Each of the major tax programs has benefits and drawbacks. In most cases, even with complicated taxes, you can save money by doing it yourself with software. However, if your taxes are very complicated or you find the process a bit too intimidating, there’s no harm in hiring a professional.
5. Save money with last minute deductions and credits
It’s not too late to contribute to a retirement account or health savings account and lower your taxes for the upcoming year. In fact, you have until tax day to take advantage of some tax deductions from the previous calendar year.
Contributing to a traditional Individual Retirement Account, or IRA, is the easiest option for most people to lower their tax bill for the current tax filing year. If you contribute to a traditional IRA, you can deduct that contribution amount from your taxable income. The 2016 contribution limit is $5,500.
Many people will fall into a 25 or 28 percent tax bracket. If you contribute to a traditional IRA before the deadline, you could save about 25 percent of that contribution when filing your taxes. If you max out your contribution at $5,500, that is a $1,375 tax savings!
Note that a Roth IRA works differently and does not lower your taxes for the current filing year. However, for young professionals, a Roth IRA is advantageous in the long-run.
Health Savings Account (HSA)
An HSA is a tax-advantaged savings account you can use for medical-related spending. An HSA is special because it offers both tax-free contributions and withdrawals. Even IRA, Roth IRA, and 401k accounts don’t give it to you that good.
You can open and take advantage of an HSA account if you have a qualifying high-deductible health plan (HDHP). To qualify, you must have a deductible of at least $1,300 for individuals or $2,600 for families.
Business and employment deductions
Did you know that your side hustle or money-making hobby can help you save on your taxes?
Any expense that was directly related to seeking new employment, such as travel for an interview or fancy resume paper, is tax deductible. If you have your own business, even one that is not registered with the government, you can still deduct expenses to lower your taxes.
For example, if you earn money from online freelancing, you can deduct the cost of computer equipment and software you use for your business. If you run a lawn care business, equipment, fuel, and other related costs are deductible. As long as the cost was incurred as part of a business, you can deduct the expense.
To take advantage of a deduction, you must also declare your side-hustle income on your taxes (which you have to do by law anyway). Many small businesses deduct expenses with a Schedule C, but that is not always the case. If in doubt, contact a tax professional for assistance.
Planning today saves time tomorrow
Taking just a few minutes to organize and prepare ahead of time can make your tax filing experience much easier. Going a step further and taking advantage of money-saving deductions can keep thousands of dollars in your pocket.
After getting organized, wait for your tax forms to come in, check them off your list, and get your taxes filed in no time!
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