- Life
Rudri Bhatt Patel Rudri Bhatt Patel Rudri Bhatt Patel is a former attorney turned writer and editor. Her work has appeared in The Washington Post, Saveur, Business Insider, Civil Eats and elsewhere. She lives in Phoenix with her family.
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Whether you’ve waited to the last minute to gather your receipts, need to find that W-2 that came in the mail months ago, or have recently realized that nothing is in one place, one thing is for certain: It’s easy for tax season to feel stressful. In fact, it seems to get more and more stressful every year, whether or not you owe taxes. You’re not alone, either, as money matters cause anxiety for most people. A 2014 report by the American Psychological Association noted that money has been a top stressor for Americans since the organization first started conducting its annual survey in 2007.
But if you’re tired of tax season stressing you out, there are ways to prepare in advance. After all, tax season happens around the same time every year, so why not take proactive measures to alleviate your future stress? It’s not too early to think about next year’s taxes right now. Here are seven expert tips on what to do now to plan for a future tax season:
Estimate your income projection.
Not only will planning ahead help you out during tax season, it might even alleviate any surprises that crop up. Adam Garcia, a financial consultant and the CEO of Stock Dork, advises clients to spend a little time each year thinking about their income projection, otherwise known as how much revenue and losses they might expect in a given year.
“Businesses make income projections to prepare for the following year’s taxes, and individuals can do it too,” he says. “Making estimates about income may include bonuses, stock options, and cash flow.” Having clarity about any future income will help you make better financial decisions, as well as estimate whether to expect a tax refund or payment, so you can plan in advance come next tax season.
Create an account with the IRS.
Are you wondering what you did with your return from last year’s taxes? If your income and liabilities didn’t change much, it might be helpful to have this information handy. “You can create an account on IRS.gov and download your previous year’s tax return,” Garcia says. The transcript will provide information and details to help you better understand your accounts and prepare the following year’s taxes accordingly.
Try to stay organized all year.
Many people panic during tax time because their paperwork is scattered all over the house. Things will be easier if you stay organized year-round. “This means having a designated spot in your house to keep things like tax documents and receipts — this will save you time when tax day arrives next year,” says Colleen McCreary, a financial advocate and Chief People Officer at Credit Karma.
You may want to consider a tracking system to stay organized, but it doesn’t have to be fancy or cutting edge. “Set up tracking systems early in the year to make your taxes easy at tax time and help you maximize your deductions, write-offs, and credits,” says Allyson Dennen, an accredited financial counselor. You can track your expenses that are eligible for tax savings, such as a FSA (flexible spending account), HSA (health savings account), and DCA (dependent care account). Then, Dennen suggests, using your spreadsheet or other system is just a matter of plugging in the numbers: “ You know the amount to allocate to these accounts when open enrollment comes around or what to claim on your taxes.”
Keep track of your charitable contributions.
If you donate clothes or money to local or national organizations, it might benefit your taxes. “While you can include charitable contributions to qualified organizations in your itemized deductions, doing so may require a little extra documentation,” McCreary says. “Be sure to get the full tax benefit of your generosity by keeping good records of all your charitable contributions to qualified organizations throughout the year.”
Keeping track of your donations can be as simple as keeping a folder at home, or on your computer, to house these donation receipts as you receive them. During tax time, you can reach for the folder instead of hunting through paperwork or an endless stream of emails.
Review your filing status, as well as the amount of taxes you get withheld in each paycheck.
Review your filing status (such as single, married, or qualified widower) since it can impact how much you owe in taxes each year, and whether or not you have to file at all. McCreary also says it’s a good idea to determine whether your filing status will change during the year since it determines your tax liability.
It’s also worth taking a look at your paycheck and making adjustments with payroll if necessary. “If you received a big refund on your tax return last year, it may mean your employer is withholding too much tax from your paychecks,” McCreary warns. That might be a good wake-up call to adjust how much is withheld from each paycheck.
“If you prefer to have a bigger paycheck to work toward your financial goals, instead of that potentially big refund next year, meet with your company’s payroll manager to review your withholding allowances on your W-4 form,” she advises. “Just be careful not to reduce your withholding by too much. Overly reducing your withholding may result in having too little tax withheld throughout the year, and could mean a big tax bill in April and potentially a penalty for failing to properly estimate your taxes as well.”
Determine if you can claim a home office deduction —and plan to invest accordingly.
Many people are self-employed or decided to establish a side hustle this past year. If so, you may be eligible to deduct expenses related to a home office. Brent Weiss, a certified financial planner and the co-founder of Facet Wealth, cautions that “there are specific requirements to be eligible to deduct business-related expenses.”
For example, the space you use must be for the specific purposes of your business and it must be the principal place of employment. If you aren’t certain, talk to your tax professional to see you qualify for a home office deduction —and if you qualify, be sure to keep any receipts for office equipment, dedicated phone lines, and any other work materials, in a dedicated folder.
Look at your entire life, not just your taxes.
“The number one mistake I see people miss when preparing for their taxes is that they look back and not forward,” says Weiss. It’s worth thinking about what changed for you in 2020 and how that will impact taxes moving forward, whether that shift was a move, a career change, a new family member, or something else.
“While that matters, the most important thing may be to plan for what may be coming down the pike in 2021,” Weiss notes. Getting married, buying a home at 25 percent over list price, or having your first child are major life events that will impact your taxes through deductions and tax credits. “If you have big plans for 2021, now may be the time to talk to a professional to plan for your entire life, not just your taxes.”
