Preparing for tax season often seems more like a sprint than a marathon as many people waits until the absolute last second. You receive your W2 forms in the mail around February and then spend a stressful weekend trying to make sense of your tax return. It does not have to be that way, prepare and plan a year before so that you can minimize your tax liability. If you are expecting a refund, you should be on top of your game and file as soon as you have all of your documents.
Filing taxes should not be so stressful, start early so you don’t get gray hairs like my fellow tax accountants out there. Save all of your documents and keep good records of them, stay organized and stay calm.
Create a list keeping track of your Documents
One of the most frustrating moments in tax preparation is discovering you’re still missing one important tax season document which impacts your return. Worst case scenario is your financial instruction… contractor cannot provide you the information until after tax season since everybody is already hounding them.
Listed below is a great starting point to begin sorting out your tax season documents:
- A copy of last year’s tax return is very helpful, most returns are generally same as last year. (Getting a copy will really help your tax preparer)
- The Social Security or Tax ID number of every member of your household
- The income records of every member of your household
- Receipts for your deductible expenses (if you are a contractor or for your business)
- Records of any taxes you’ve paid throughout the year (estimated quarterly payments)
You are now in a great position to begin the process of filing your return: Great work!
Organize your receipts
Keeping track of tax-related receipts throughout the year is one of the most difficult parts of handling your taxes. Many people throw all of their receipts for work-related expenses, charitable donations, mortgage payments, medical expenses, and interest statements in a single folder or box to deal with “later.”
This results in a disaster when it comes time to sort it out, if you are a contractor or running a business it would be wise to book keep these expenses as they come in. Using a software will greatly help, but you can always create a simple excel spread sheet.
Gather All of you Income
The majority of filers will receive either a W2 or 1099 form from their employer(s), it’s still a great idea to gather your paystubs before the end of the year to get a rough idea of your income. That will help you identify any potential mistakes on your W2 or 1099 forms as soon as they arrive. It’s far better to catch a mistake early rather than find you need to request a corrected form close to the IRS deadline. Otherwise, you would have to contact your employer and amend your tax return which delaying the return not always fun.
Pro tip, reviewing over your paystubs all at once gives you a chance to take a look at your federal and state tax season withholding over the year, as well as any pretax contributions you’ve made to your 401(k) or IRA.
Review your W4
The W4 form determines how much tax withholding is taken from each paycheck and this gets asked a lot. If you expect to receive a large refund this year, you can adjust your withholding allowances now to ensure you do not get too large of a refund.
Remember, a big refund means you are giving an interest free loan to the government so it would be wise to keep as much as your money throughout the year. If, on the other hand, you worry that you may owe money because you didn’t have enough withheld, now is a good time to adjust your W4 to be sure you don’t owe any tax season at end of year.
Plan ahead for your refund
If you expect to receive a refund this year, start thinking about the best way to use the money now. We tend to think of a tax refund as “free money,” even though it’s your money you overpaid to the IRS. It would be wise to invest your money or even create a rainy-day fund that could come handy.
There’s nothing wrong with enjoying your tax refund, but taking a hard look at your budget and finances now can help you to determine if having fun with your refund is the best use of the money. Paying off debt is always wise and boring, but the peaceful sleep you gain should be motivation. Review if there are any major goals you’re saving toward — like a down payment on a house — that would benefit from an injection of cash?
Conclusion
Getting a jump start on your filing chores will not only make tax season much easier, but it can also help you prepare for your finances in the coming year. Throughout the year always plan and think ahead about tax season credits and deductions you can apply and factor decisions around those life moments. Start 2023 on the right financial foot by starting your tax season preparation early.
