Happy tax season everyone! This is a time of year that can be anxiety inducing for many of us, but it doesn’t have to be that way. Filing your taxes may seem daunting, but with some preparation, it can be a much smoother process. Before you dive into the tax filing process for the 2024 tax year, there are several things you can consider to ensure everything is in order. Here’s what you need to do before filing your taxes:
1. Get Organized
Before you can file, you’ll need to gather all relevant financial documents from the previous year.
These include, but are not limited to:
- W-2 Forms: These forms, provided by your employer, show your total earnings and
taxes withheld. - 1099 Forms: If you were self-employed or received other forms of income, such as
interest, dividends, or freelance work, you’ll need the appropriate 1099 forms. - Profit and Loss Statement: Own your own business? A clean and accurate profit and
loss statement (P&L) can make filing your schedule C simple and stress free. - Mortgage Interest Statements: If you own a home, you may be able to deduct
mortgage interest and property taxes. - Charitable Donations: Gather receipts for any charitable donations you made
throughout the year. - Medical Expenses: If you’ve incurred significant medical expenses, have those receipts
ready for potential deductions. These are deductible if greater than 7.5% of your
adjusted gross income. If you want to make sure your time gathering medical expenses
is worth it – grab your 2023 tax return, find form 1040 line 11, and multiply by 7.5%. Ex:
Line 11 on form 1040 is $100,000. This times 7.5% is $7,500. Any medical expenses
over that can be deducted, assuming you are itemizing deductions.
2. Consider Tax Deductions and Credits
Deductions and credits can significantly reduce your tax liability, but they don’t apply automatically—you need to know which ones you're eligible for. Some common ones include:
- Standard Deduction vs. Itemized Deductions: You can either take the standard deduction or itemize your deductions (whichever is more advantageous). Common itemized deductions include mortgage interest, property taxes, medical expenses, and charitable contributions.
- Earned Income Tax Credit (EITC): If you are working but have a low to moderate income, you may qualify for this credit, which can provide a substantial refund.
- Education Credits: If you or your dependents are in school, look into credits like the American Opportunity Credit or Lifetime Learning Credit.
3. Consider “Bunching” Deductions
Many taxpayers have deductions that rise close to the standard deduction threshold, but don’t quite go beyond it. If this applies to you, “bunching” your deductions could be a viable strategy. Bunching is when you accelerate or delay deductible expenses to maximize itemized deductions in a single tax year. For example, if you're close to the standard deduction limit, you might bunch two years’ worth of charitable donations or property taxes into one year to surpass the standard deduction threshold, then in the next year you would take the standard deduction.
4. Consider Contributing to Retirement Accounts
If you’re eligible, contributing to a retirement account like a 401(k) or IRA can help reduce your taxable income. The IRS allows tax deductions for contributions to traditional IRAs and 401(k)s, which can be a great way to reduce your tax bill. You are able to make 2024 IRA contributions, within the limits, up until the tax filing deadline. That makes this one of the few tools you have left after the end of the tax year.
5. Double-Check Your Withholding
Take a moment to assess how much federal tax has been withheld from your paycheck during the year. If you’ve had too much withheld, you might be due for a refund, but if too little was withheld, you could owe additional taxes. If you expect to get a sizable refund, it may be to your advantage to lower your withholdings going forward and have increased cash flow throughout the year. On the other hand, if your withholdings fall below certain levels, you may be subject to penalties.
6. Consider Hiring a Tax Professional
If you have a complex tax situation or simply would prefer not to deal with the hassle yourself, hiring a tax professional could be worth exploring. They can help you maximize your deductions, avoid costly mistakes, and ensure you’re fully compliant with tax laws. Tax professionals can be especially helpful if you’ve recently experienced a major life change, such as starting your own business or delving into the world of rental real estate.
7. File Early to Avoid Stress
Procrastination can lead to stress and mistakes. Once you have all the necessary documents and information, file as early as possible. If using a tax professional, this gives him/her more time to look through your information and determine if more information is needed to finalize your return. Early filing can also help you receive any potential refund that much sooner.
By being organized and timely, you can make tax season much less stressful. Taking proactive steps before filing your taxes will ensure that you’re prepared and able to file with confidence. Whether you do it yourself or enlist the help of a tax professional, a little preparation now can save you time, money, and headaches later.
Happy tax season!