Tax Season Preparation: 5 Steps to Get Ready for Next Season
No one wants to run up against the tax filing deadline and have to request extensions. Fortunately, much of the last-minute frenzy in April can be avoided if you take care of tax season preparation earlier. Here are five important steps to check off your list before the season starts.
1. Keep Accurate Records
Collect all tax documents you receive from your employer, banks and other financial institutions. Be aware that if you have a side job or sell products online and get paid through a payment network like PayPal, you won't receive a Form 1099-K from the payment network unless you make at least $20,000, according to the IRS. In that case, it's essential to keep a record of your transactions yourself so you can report all your income. Also, check that you have the correct social security numbers for yourself, your spouse and any dependents.
2. Decide Which Method to Use
Having a CPA prepare your taxes can save you money in the long run because a tax expert can spot opportunities to cut your tax bill, such as deductions you might not know about. Also, unless you are very familiar with the tax code, you could make mistakes when doing your own taxes, leading to hefty interest payments or penalties.
Preparing your own taxes makes the most sense if you have tax experience or if your taxes are simple — for example, if you don't itemize deductions and you have no capital gains or self-employment income. You'll probably still want to pay for online software to streamline the process and make sure you don't overlook any lines on your form. If your income is below $64,000, a link to a free tax preparation program is available from the IRS.
At all income levels, free online forms will do the arithmetic for you and allow you to file online as soon as you complete your return. However, these forms don't offer any explanations or help with tax preparation, so it's advisable to use them only if you're very comfortable with taxes.
3. Plan for Changes
Review the previous year's taxes and see what's changed. Do you have an additional dependent this year? Are you going to file jointly with a spouse for the first time? Did you buy a house or begin paying back student loans, making you eligible for interest deductions? Note anything that's new about your financial situation so you know what aspects of your taxes will be different the next time you file.
4. Update Your Withholding or Self-Employment Payments
Did you get a large refund this tax season? If so, the amount you're withholding from your paycheck might be larger than necessary — meaning you're giving the government an interest-free loan out of your earnings. You can correct this by filling out Form W-4 and giving it to your employer. Similarly, if you're self-employed, you should check if your quarterly payments were too large or too small last year and adjust this year's payments accordingly. Payments that are too large represent money that isn't earning interest for you, while too-small payments usually result in penalties from the IRS.
5. Make Tax-Advantaged Contributions
Now is a good time to contribute to tax-advantaged retirement accounts and to donate to charities. Although you can deduct charitable donations that you make up until the end of the year, and you have until the tax deadline to make IRA contributions for the preceding year, it's smart to get these contributions out-of-the-way sooner. Then you know you won't miss the deadlines, and you won't have to juggle retirement contributions and tax preparation at the same time during next tax season.
Working on tax season preparation early may not give you a stress-free season, but it can definitely mitigate the chaos and make the whole process easier to handle.