Tax Season is Over - Here’s What to Do Now

After filing your taxes, you may find yourself feeling fatigued from all the paperwork and numbers you’ve been crunching. But, before you put your documents away, follow these five tips that can help you save time, reduce stress, and get your taxes in order for next year.

5 Tips for a Successful Tax Preparation for Next Year

Plan Ahead

One of the most important things you can do to prepare for next year’s taxes is to plan ahead. It may seem obvious, but tax planning can be a lot easier when you start early rather than waiting until the last minute.

By getting organized, you will be able to save time during tax season when there are so many crucial tasks to take care of. This includes looking over last year’s W-2s, 1099s, or other forms of taxable income.

Another thing to consider is any major life events that might affect your taxes for next year, such as a marriage or divorce that could change your filing status from single to head-of-household or vice versa. These major life changes also affect your financial picture. Now is the ideal time to make adjustments to your investment portfolio and prepare you for your new chapter.

Track Your Investments

If you’re like most people, you may have trouble remembering all the stocks, bonds, and mutual funds you own. But it is important that you keep track of this information for next year’s tax preparation. If you are working with a financial advisor, they will do this for you. This will ensure that any capital gains or losses are properly accounted for when determining your income and final tax bill.

Consider making IRA contributions early in the year if your income is predictable so that you give your investments the most possible time to earn in their tax-free environment.

Additionally, this is the perfect time to sit down with your financial advisor. While all those documents are out, you can adjust your financial plan if needed.

Adjust Your Withholdings

You may not think about withholdings until you are filing your taxes. However, the time to think about them is at the beginning of the year, because it ensures that you account for all your dependents and aren’t giving Uncle Sam too much throughout the year.

Although it’s fun to open up the mail and get a big check, that means you’ve given Uncle Sam too much. That money could’ve been used more effectively in retirement planning and your investment portfolio.

Check out this calculator here.

Max Out Retirement Accounts

Oftentimes an employer will do an employee match when you contribute to your 401(k). Taking advantage of that means that no money is left on the table. The power of compounding works for you as you put as much as possible into your retirement account, let your employer match you, and watch it grow.

As a self-employed individual, you can also max out your IRA or Roth. While you don’t receive any bonuses from the employer match, you can make the power of compounding work for you by contributing as much as you’re allowed every year.

Speaking with your financial advisor is the best way to know how to allocate your money to make it work for you. How much you are able to contribute depends on your age, how much you’ve contributed in the past and whether you’re “behind,” and other allocations you want to make.

Start a Health Savings Account

A health savings account (HSA) has a lot of tax-saving benefits. They are one of the most tax-efficient financial tools available. You don’t pay taxes on your contributions, growth, or withdrawals if you use the money for qualified medical expenses. Therefore, if you are eligible to open an HSA, it may be worthwhile to look into it so that you can save money tax-free.

Once you turn 65, you can take distributions from your HSA just like other retirement accounts. You won’t be penalized for using the money on non-qualified medical expenses at that point. In that way, your HSA provides a tax-free source of retirement income much like a Roth IRA or Roth 401(k).

Consider a Roth Conversion

With a Roth IRA, you contribute after-tax dollars and are rewarded when you withdraw the money in retirement because it’s tax-free! But there are limits to how much you can save into a Roth IRA every year, along with income limitations.

For 2022, individuals can contribute $6,000 if they are under 50 years of age or $7,000 if they are 50 years of age and older. Single filers can contribute these maximum amounts if they make $129,000 or less, married filing jointly can’t exceed a household MAGI of $204,000. Incomes in excess of these limits lower the amount you are eligible to contribute to a Roth, phasing out completely once single income reaches $144,000 and married income reaches $214,000.

To take advantage of this tax-sheltering tool, individuals and households who exceed the traditional income limits for a Roth IRA may convert their traditional IRA into a Roth IRA by a strategy known as a backdoor Roth IRA conversion or Mega backdoor Roth conversion.

It is safe to assume that taxes will be higher in the future than they are today, so this is one way you can increase a tax-free bucket of retirement income.

These five tips can help you prepare for tax season next year. Although you may traditionally think about tax planning as a task that is done with your CPA, it also affects your retirement, tax bracket, and disposable income. These discussions can be facilitated by a fee-only financial advisor who makes your future his priority. If you’d like to schedule a time with me to create your annual plan to save the most on taxes and put more into your retirement, you can do so here.