Get Ready for Next Year’s Tax Season Now

Every year we go through the recently concluded ritual of getting everything together to file our taxes. Some people complete the process earlier than others, especially if they are anticipating a refund check. It is pretty much universal that we see this annual ritual as a necessary evil as almost nobody enjoys what it takes to file their taxes. However, it is rare that people change the things they do at this time of the year. Most people have filed their taxes by now, but of course there are people who get down to near the deadline and come to the conclusion that they can’t get it all completed and will need to file an extension. Hopefully you are not one of those people who goes about it this way on an annual basis. Regardless, if you want to improve your experience with taxes next year, now is maybe the time to do the things necessary to make that happen while this year’s taxes are fresh in your mind. In other words, rather than wait until after the year is already over and there is nothing you can do about what happened in 2024, be proactive in your tax planning to help you get an outcome more like you want it to be when the time comes to start preparing for the 2024 tax season. While this issue of the newsletter is intended to help you think differently about how you handle your taxes, this should not be considered tax advice, and you should consult with a tax professional to determine what is right for you.

Review Your Deductions
If you typically take the Standard Deduction when you file your taxes, maybe this idea won’t be as beneficial for you. On the other hand, maybe you have not taken advantage of every deduction you could possibly use that could lower your taxes. With the changes that have occurred over the years, the ability to itemized deductions for many tax filers has decreased, but it could be worth your while to see if you have deductions that could help you lower your tax bill. Probably the most obvious one to consider would be the interest on your mortgage loan, and if you own a home the real estate taxes you pay to your county and/or municipality. While there are a variety of reasons homeownership can be a financially savvy move, the tax deductions are near the top of the list. Another common deduction is for charitable contributions. Those could be the monetary donations to the church you attend, churches you visit, or other non-profit organizations, but you also can consider other contributions you make to these organizations that might be considered donations of your resources. For example, if you donated some item of value to an organization, that item has worth and could be deducted. To quantify what you can take as a deduction, it helps to get some acknowledgement from the organization. Or if you participated in a clothing drive for a non-profit, not only might you be able to consider the clothing your donated as a deduction but also the mileage you drove to find those items of clothing could be a deduction as well. Returning to the category of homeownership for a moment, if you took out a mortgage and paid points when closing the loan, you can usually take a deduction in the year of the purchase, or if you have private mortgage insurance premiums you pay on your loan, those premiums can be deducted if your Adjusted Gross Income is within certain limits. There are other possible deductions that are available that you may not have known to take advantage of, and the point here is that by evaluating now, ideally in consultation with your tax advisor, you may have more opportunities than you recognized to improve your tax situation.

Evaluate Your Withholding
Chances are if you were anticipating a refund, you filed your taxes quite a while ago to get that money in your hands as quickly as possible. It is usually the people who think they may owe money who are the late filers. You’ve probably heard it before that getting a refund is not necessarily a good thing, but to amplify the point, when you get a refund, what that means is the government has been holding onto your money throughout the year and months after the fact returned it back to you. If it works better for you to use the refund as your windfall, you may know yourself better than anyone else, and that strategy may work for you. However, it is worth being honest with yourself about how you are actually going to use that refund and whether it is going to be used primarily for the purpose of improving your financial situation or to give you a little extra to buy some things you want. That leads to the question of your ongoing tax withholding. If you work as an employee and have taxes withheld from your paycheck, chances are you can get pretty precise on how much to withhold. If you do a good job of projecting what your tax liability is likely to be (again it’s a fairly straightforward estimate if you are an employee), you can get very close in tax withheld to the amount of your liability, which would leave you fairly close to a breakeven point when it is time to file your taxes. Financially speaking, that is actually the best outcome, to withhold about what you owe.

Organize Your Records
One of the big points of stress at tax time is pulling the documents you need together to get to your tax preparer, even if that person is you. If you’ve struggled with this year after year, use this post-tax season as a time to evaluate your record keeping and set up systems that will make it easier for you to handle tax time next year. If you haven’t created a dedicated file for your tax documents, that would be a good first step. In these days with so much of what we receive being electronic, you may choose to make your file an electronic rather than paper file, or maybe you want to have both. Either way, you should have a place where all of your documents can be stored for easy access. Within that filing system, you can have sub-sections that are categorized for different things that you will receive, like W-2’s, 1099’s, or other statements pertaining to income received, statements showing deductible items you paid out, and receipts for items you need to include for deductions that may not have already been filed with the tax authorities but for which you will need to show your records if you were to be audited. If you have loose items like receipts, make your life and that of your tax preparer easier by copying those items onto regular sized pages or scanning them so they are available electronically. If you have your system setup well in advance and can put the new information into those files as you go throughout the year, you won’t have to scramble to find everything and organize it when it gets down to time to file your taxes.

If you have breathed a sigh of relief that tax time is over once again, and you don’t want to think about it again until next year, resist that temptation and put in a little time now so that when you get to this time next year, you can feel confident that you have put yourself in the best position possible to make the experience less stressful and easier to navigate.

Stewardship Emphasis

Sacrificing a little time now can save you a lot of time later.

The Empowerment Channel |Volume CCXXIV | Dedicated to Promoting Financial Education through Stewardship