Tax season just ended but it’s not too late to get started on next year’s taxes now. In fact, starting now can lead to big savings and money in the bank instead of owing money to the IRS.
The most important thing you can do is get organized. Whether you use a digital filing system or the tried and true envelope system, figure out your way to organize. And lucky for today’s savvy consumers, you don’t have to reinvent the wheel while finding a system that works for you. A quick google search shows tax expense trackers from money management behemoth QuickBooks to multiple apps with five-star reviews like Forereceipt Tracker App, Receipt Scanner, and Taxnote. If you choose to go the envelope route, the experts at QuickBooks recommend setting those envelopes up early and keeping them organized regularly.
Set up a folder system for all your tax mail. It’s terrible when you’re on the computer on April 14 doing your taxes and know you had a 1099 from somewhere, but you can’t find it, and you can’t remember who it’s from. Don’t let that happen. Get that folder system ready.
Deductibles & Donations
Don’t forget your IRA. You have choices here. Choosing a Roth IRA or Traditional IRA leads to big tax credits. Both have contribution limits of $6,000 a year until you turn 50. After that, you can add an extra $1,000 annually as a “catch-up” in your final years of working. Once you turn 70½ in the calendar year, you are no longer eligible to contribute to a traditional IRA. A Roth IRA is taxed before you invest, so it grows tax-free and you’re not taxed on your distributions. A Traditional IRA reduces your taxable income but is taxed as you take distributions. Both add a nice credit to your taxes and can lead to that final number showing green instead of red when figuring out your taxes for the year.
Do you qualify for an HSA? If the answer is yes, get one now. HSAs offer triple tax advantages. Your HSA can be set up pre-tax or you can contribute directly for tax savings, any interest or earnings from your account grow tax-free, and you can pay for qualified medical expenses on a tax-free basis. There is a yearly limit to how much you can contribute. In 2022 that limit for an individual is $3,650. For families, it’s $7,300. HSAs can be invested, so they can grow. Take advantage of the HSA tax savings.
Keep track of your charitable donations. That extra deduction can come in handy. Single filers can now deduct up to $300 and married filers $600 for cash donations to charity.
Salary & Self-Employment
Check your W-4 and make sure your withholdings aren’t putting you in the red at the end of your tax season. You don’t want to overpay, but underpaying leads to sending the IRS money in April. If you’re self-employed, don’t forget you have to pay taxes on the money you earn and a self-employment tax. In addition to federal, state, and local income taxes, simply being self-employed subjects one to a separate 15.3% tax covering Social Security and Medicare. While W-2 employees “split” this rate with their employers, the IRS views an entrepreneur as both the employee and the employer.
There’s truth to the old adage nothing is certain but death and taxes.
Get organized and take advantage of the tax credits and deductions available and turn that dreaded tax-day stress into a day of relief knowing you’ve done all you can in advance to prepare for next year’s tax season.