Taxes are notorious for being complicated, and you may feel unequipped to plan ahead for what’s going to happen come tax season. However, it is important to stay on top of your tax preparation as part of your overall financial picture. Taxes do not have to be difficult if you know what to look for and how to get ready for filing. Here are some tax planning tips to get you started.
Understand Deadlines and Categories
The first (and perhaps most important) thing you need to think about when filing taxes is when the deadline is and what kind of taxes you need to file. Most people think of that notorious mid-April day as the due date for their taxes, and for many people, this is true. However, it is not necessarily the whole story.
If you are self-employed, for example, you should be making estimated tax payments quarterly (though you may do so more often, like monthly, if you want to). Your filing deadline is technically the same April one as others, but if you wait to do anything until then, you might face some fees or penalties for failure to pay federal or state taxes quarterly.
The type of work you do also affects how you file taxes. You”ll need to use different forms for different things. While a standard office worker uses a 1040, someone who runs their own small business might use a 1099.
Dispel the Myths About Tax Brackets
One of the most common misconceptions about taxes is that the more you make, the more you are taxed. However, this is only partially true. Some people are hesitant to take a raise because they say it will “push them into the next tax bracket.”
In reality, brackets work as a function of money in excess of a threshold. For example, in 2022, the 12% tax bracket extended up to $40,525. If you made $50,000 (which exists within the 22% tax bracket), you may think, “now all of my income is being taxed at 22%!” What actually happens is that only the money in excess of $40,525 is taxed at 22%. Brackets work within themselves, not inclusive of the entire amount.
Track Deductions Over the Year
Another choice you will need to make is whether to itemize your return or take the standard deduction. A deduction reduces the overall amount you are taxed on, and depending on your situation, it can vary from approximately $12k to around $18k. However, if you have a lot of deductible expenses, like medical bills or charitable donations, itemizing may be better.
Keep track of your deductible expenses over the year. If they total more than your standard deduction, consider itemizing your return.
Know the Credits You Qualify For
People who file taxes can often qualify for credits or tax offsets in exchange for certain behavior. Do some research into the types of credits you can qualify for. They range from adopting a child or sending a child to daycare to paying interest on a mortgage or installing equipment that makes your home more energy-efficient. Claiming credits that you qualify for can reduce your overall tax bill.
Shelter Money When Possible
Taxes go toward important things like maintaining roads and funding nationwide programs. However, you do not necessarily need to pay taxes on all of the money that you make. Consider how you can strategically shelter some of your money to make it work for you without paying taxes on it.
For example, adjust your withholding with your employer so that you pay the right amount. Otherwise, you may under (or over) pay and see either an unnecessarily large refund or a looming tax bill.
Similarly, consider putting money in a 401(k). The IRS will not tax as income money that you directly move from your paycheck to a 401(k) retirement account, which means it’s tax deferred. You’ll only pay taxes on it later, when you take it out. In this way, you can contribute to your savings without paying taxes on up to $20,500 (or $27,000 if you are at least 50 years old) per year.
Talk to an Advisor to Discuss Your Goals and Strategies
Understanding how to set your financial situation up for maximum tax season efficiency can feel overwhelming. The good news is that a financial advisor can help to point you in the right direction. The professionals at Inflection Advisors would be happy to offer suggestions to equip you with the skills and knowledge you need for your tax planning. Reach out to learn more or to schedule an appointment to get started.
