How to End the Year // Preparing for Tax Season
Considering these tax tips now can help to set you up for a successful tax season later. Read on for information around offsetting gains, how you could spend extra cash before the end of the year, filing sooner or requesting an extension, and tracking your deductions. Whenever you’re in doubt or have a tax-related question think about using the IRS’s website as a resource -- their Interactive Tax Assistant (ITA) tool provides answers to a number of tax law questions from taxable income to filing status to questions surrounding dependents.
You don’t need to be a tax savant to be successful next tax season but you do need to be prepared. Although April 15, 2021, might seem like a far off date, it’s time to start preparing now. Beyond making sure you have all the correct paperwork at the ready for you, your spouse, and your dependents (you can find a good list of necessary paperwork here) and ensuring your paychecks and withholdings amounts are correct, here are some things you can do now, to help make you successful on April 15.
Take a look at your investments to see if offsetting gains is right for you. If you hold an investment for more than a year before selling, your profit is considered a long-term gain and is taxed at a lower rate. You can minimize or avoid capital gains taxes by investing for the long term, using tax-advantaged retirement plans, and offsetting capital gains with capital losses.
If you have extra cash on hand and need to off-load it by December 31, 2020 in preparation for Tax Day 2021, consider tax-deferred investments like real estate, adding money to retirement accounts, investing money back into your small business, or supporting a loved one by contributing to a 529 plan. There are also tax-free considerations like charitable giving and maxing out an HSA account.
If you’re organized, and you know your numbers don’t wait until April 14th to file your taxes. Did you know you can file as early as January 27, 2021? Beyond feeling the wave of relief knowing you’re not worrying about taxes for the first half of the year, your preferred tax professional might have more time to spend with you earlier in the year to really help you understand how to make your money work harder for you in the future. If you think you’ll need an extension, file anytime starting January 1.
Track deductions throughout the year. When you include deductions with your taxes you have the opportunity to lower your tax bracket -- which means you’re decreasing your total taxable income, leading to potentially owing less income taxes. Start by making an itemized list of deductions and then be sure to have the paperwork to validate your list. Things like childcare expenses, scholarships received, small business costs can all be included -- the IRS has a full list of deductions to consider.
Don’t be scared of tax day, just be prepared. Taking a proactive approach throughout the fiscal tax year can mean a smoother and more stress-free filing experience. Pay attention to your income and financial opportunities now, so you can feel more secure in your approach later.