Tax planning is a year-round process that doesn’t stop, as long as you’re staying on schedule. When planning for tax season, make it smooth with a schedule that includes:
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- Developing a reliable document filing system and tracking income/expenses if necessary
- Making estimated tax payments if self-employed or receiving significant non-wage income
- Making adjustments to tax withholding if your tax or financial situation changes
- Executing transactions on time that have a significant tax impact
- Adjusting your tax planning approach for following tax years
There are several factors that may influence your tax planning timing as well. For instance, if your tax situation is complex, consider consulting with an experienced tax professional to help with the planning process and make tax season go a bit smoother.
Do You Have a Consistent Filing and Recording System in Place for Your Documents?
If you haven’t already, it’s time to create your own filing system at home to track important financial documentation. A simple filing cabinet will do, just be sure to use one that can be secured. When filing important financial documents, consider making copies and keeping them in a fireproof safe.
File any tax or financial documentation that may have an impact on your tax filing. This includes:
- Receipts
- Invoices
- Financial statements
- W-2s/1099s
- Previous tax returns
With this documentation on hand, you’ll have what your tax preparer needs once it’s time to file your taxes.
Are You Making Estimated Quarterly Tax Payments?
For the self-employed, such as contractors and freelancers, and for those that receive significant non-wage income from rental properties or investment income, taxes must be paid in quarterly installments to the IRS. This is done using Form 1040-ES and is due four times a year (April 15th, June 15, September 15th and January 15th). Check your state’s deadlines for estimated tax requirements and deadlines, as they sometimes differ from federal requirements.
Have You Reviewed Your Financial Situation and Made Needed Adjustments?
The summer is the best time to perform a comprehensive review of the ongoing tax year. Verify that you’re in line for the tax deductions and tax credits you qualify for. Verify that your income and expenses are tracking where you expect them to be at the end of the year. If you uncover any discrepancies, you’ll still have time to make corrections before the tax year is over.
For example, it’s common for people to move into a higher tax bracket without expecting it. This could be due to a promotion at work or a bonus. If this is the case for your tax situation, update your W-4 for withholding purposes.
Are You Executing Any Transactions That Will Make a Significant Tax Impact?
Numerous tax planning strategies must be executed before the end of the calendar year. These strategies include:
- Charitable giving – Charitable donations can be itemized and if they exceed the standard deduction, this can make a sizable dent in your taxable income. Donation appreciated long-term assets also opens up an itemized deduction and you don’t have to pay capital gains tax on the transaction.
- Loss harvesting – If you’re holding onto depreciated assets and expect to take a loss on them, you can realize those losses and use them to offset capital gains taxes on appreciated assets. With smart use of loss harvesting, taxpayers can pick up gains without outsizing their tax liabilities.
- Accelerating or deferring income – If you have some control over when you’re paid, delaying that income can keep you from sliding into a higher tax bracket. Even delaying an invoice or two can make the difference here.
Have You Considered Using Your Current Tax Filing to Plan Next Year’s Taxes?
If you’ve stayed on point with your tax planning throughout the year, filing should be a breeze when tax season rolls around. A tax preparation expert can expedite filing for you, especially if your financial documentation is in order, and this may be worth it for business owners and those who don’t have the time.
Once you’ve filed your tax return, it’s important to start thinking about next year. Many tax planning strategies must be acted on early, so don’t delay.
Your tax planning expert can review your tax return and deductions and optimize your tax planning approach for the following tax season, whether it’s realizing gains on certain investments, gifting assets to loved ones, establishing a tax-advantaged retirement account, targeting certain tax credits or another tax-saving strategy.
What are Some Factors That May Affect Your Tax Planning Timing?
Every individual’s tax situation is unique and therefore your tax planning may be governed by unique factors. For example, any of the following factors may alter your tax planning timing:
- Income timing and the nature of your income (W2s, 1099s or investment income)
- Major life events, like marriage, divorce, a new child, death, moving to another state, etc.
- Starting a new business entity, purchasing equipment or hiring employees
- Major transactions, like selling assets or acquiring an inheritance
- Changes in tax laws
Find a Reputable Tax Professional to Help You Start Planning for Tax Season
Taxes are complicated, especially if you’re taking a long-range planning approach for the first time. Whether you’re looking to minimize your tax liabilities or just want to ensure your taxes are properly managed, a tax planning expert can identify the most effective strategies for your situation and tax-related goals.
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