HOW TO STAY UP TO DATE AND DO ALL YOU CAN TO REDUCE YOUR TAX BILL
As we approach the April 18, 2022 tax filing deadline, remember that preparation is the key to maximizing your tax situation. It’s never too soon to start thinking about how to handle your federal return, and you can use this tax prep checklist to help you meet your obligations and take advantage of any savings opportunities.
Why You Should Focus on Preparation
A relatively new law—the Tax Cuts and Jobs Act of 2017 (TCJA)—made changes that many taxpayers may still be getting used to. The legislation eliminated many deductions, doubled estate tax exemptions, put new limits on home equity debt deductions, and changed the tax brackets, among other things.
New guidelines aren’t the only things to consider as you prepare for this year’s tax filing deadline. As the COVID-19 pandemic continues to unfold, the IRS is anticipating the potential for processing delays. It can be a lot to keep straight, even if your financial situation isn’t particularly complicated. Let’s review eight ways you can make sure you’re as prepared as possible.
Know When to Hire a Professional
Hiring a Certified Public Accountant or other tax professional is a smart way to make sure your taxes are in order, especially if you’ve had any recent life changes. If you changed jobs, started a business, got married or divorced, or had to claim unemployment benefits, your taxes could be more complicated.
Hiring a professional takes time, and waiting until April arrives before you make a decision can end up costing you. Many tax professionals will increase their rates as the tax filing deadline gets closer.
In 2021, the average fee for a professional to handle your taxes was $515, according to the National Society of Accountants. That covers preparation and filing an itemized Form 1040 with Schedule A, Schedule C (for sole business proprietors), and a state tax return.
2. Know Your Other Tax Prep Options
If you’re worried about how to pay to get your taxes done, there are some good cost-free options:
- Free File Alliance: A coalition of tax software companies that partners with the IRS to help taxpayers prepare and file their returns. If you have an adjusted gross income of less than $72,000 you could qualify.
- The Volunteer Income Tax Assistance: This program uses IRS-certified volunteers to help people who earn less than $57,000 a year prepare and e-file their taxes. They also have programs specifically for people who are disabled or whose English is limited.
- AARP Foundation Tax-Aide: Specifically for people 50 and older, this service helps those who can’t afford a professional tax preparer.
If none of these fit your situation or financial needs, the IRS has an online location tool you can use to discover other free tax preparation sites.
3. Keep Beneficiary Designations Up to Date
Getting the most out of your taxes depends on proper planning. Designating beneficiaries won’t affect your taxes now, but it can make a big difference for your heirs in the future.
If something unexpected happens, having your beneficiaries selected and making sure things are set up in advance can protect your heirs from the impact of significant tax liability when they inherit your assets. Tax season is a perfect time to review your designations and make any needed changes.
4. Max Out Your Retirement Options
If your employer sponsors a 401(k), 403(b), or another tax-deferred retirement account, maxing out your contributions can reduce your taxable income for the year. It isn’t taxed until you choose to withdraw it.
- You can contribute $19,500, plus $6,500 in catch-up contributions if you’re 50 or older, into a 401(k).
- You can contribute $6,000 plus $1,000 in catch-up contributions if you have an IRA.
If you can’t afford to make the maximum contribution, try to contribute at least whatever amount will be matched by your employer. An employer contribution is essentially free money that can grow tax-free.
5. Protect Yourself from Fraud and Scams
Unfortunately, tax season brings with it a rise in IRS and U.S. Treasury scams. Bad actors use phone calls, emails, and text messages claiming to be official representatives in order to get you to turn over your personal information. It’s important to know that these organizations only correspond with you via U.S. mail unless you are in the midst of litigation.
As an added layer of protection, use two other safeguards. 1) Always make sure your IRS tax preparer is legitimate. The IRS website has a directory of registered tax preparers to help you double-check. 2) Set up direct deposit if you expect a refund, and if you owe money, send it via IRS Direct Pay.
6. Be Smart About Deduction Strategies
The TCJA increased the standard deduction, which makes it harder to exceed the threshold and maximize your return.
In 2021, the standard deduction was:
- $12,550 for individuals
- $18,800 for heads of household
- $25,100 for married couples filing jointly
You can surpass standard thresholds by “bunching” deductions, i.e. changing the timing of certain deductible expenses to fit in the same calendar year. Common items you can bunch are charitable donations, property taxes, or a big medical bill.
7. Time Your Required Minimum Distributions
Required minimum distributions (RMDs) are a necessary part of any 401(k) plan. In exchange for the chance to grow your investments tax-deferred, the IRS collects on the tax revenue it’s owed when you turn 72 years of age.
Make sure you take your RMD by December 31, or you’ll be penalized 50% of the undistributed amount.
8. Watch for IRS Correspondence – And Respond When Required
For the 2021 tax year, many people will be receiving letters from the IRS. Letter 6419 will arrive in your mailbox if you received the Child Tax Credit advanced payments from July – to December. Letter 6475 will detail any stimulus payments you received.
If you’re contacted by the IRS on any matter, take it seriously and respond right away if you are required to. Taxpayers who owe taxes or don’t file their returns on time (or at all) are at risk of incurring serious penalties. The IRS won’t hesitate to seize your assets, garnish your wages, or place a lien on your house.
When you do respond, the IRS is usually happy to work with you to rectify the situation. Make sure to keep copies of your correspondence and mail your response via the U.S. Postal service, which timestamps all incoming and outgoing mail.
Tax Preparation Tips: Final Thoughts
There’s a lot to think about come tax time, but there are also a great number of strategies to help you get a head start and make the most of the opportunities available to you. Use this tax prep checklist to prepare early so you can remain in good standing with the IRS and potentially reduce your tax bill, too.