Tax season officially kicks off in January and if you haven’t started preparing your taxes yet, remember that it’s always a good idea to start sooner rather than later. You don't want to be scrambling at the last minute to meet the filing deadline. There are often questions and unknowns, so getting an early start can allow you enough time to ensure a timely filing.
You’ll want to remember a few key things when you are preparing your tax filing. Here are six things that can help you optimize your filing strategy and possibly even increase the size of your tax refund.
1. Weigh Standard Deductions Against Itemizing
The Tax Cuts and Jobs Act introduced higher standard deduction limits for tax filers in 2018. At the same time, it eliminated personal exemptions and reduced or eliminated several key deductions. The increased standard deduction might result in a lower tax bill for some taxpayers, but it's still worth it to consider itemizing.
Review your tax filing to determine all the possible deductions you can legitimately claim, then compare your estimated tax liability with what you might owe (or get back as a refund) if you opt for claiming the standard deduction instead. It might also be worth taking the additional time or cost (if you're paying a tax professional) it would take to collect itemized deduction information and factor it into your tax return.
2. Provide Dependents’ Social Security Numbers
You'll need your dependents' Social Security numbers to claim certain tax credits, such as the Earned Income Credit or the Child and Dependent Care Credit, or to file as head of household. Make sure that your ex-spouse isn’t also claiming the same dependent if you're unmarried. Your return could be audited if two taxpayers claim the same dependent. If you're planning to claim the child care credit, remember to review the IRS guidelines to make sure your expenses and your dependents are eligible if you're planning to claim the Child and Dependent Care Credit.
3. Organize Your Records and Documents
Being disorganized could cause you to lose out on significant deductions if you’re scrambling to find receipts and proof of expenses while you're preparing your taxes. One way to avoid that type of headache is by using an expense tracking app to store digital copies of all your receipts. It’s a simple strategy, but incredibly effective. And you'll have all the documentation you need to verify your deductible expenses if your return is selected for an audit by the IRS
4. Contribute to Your Retirement Accounts
You might be filing for taxes incurred in 2020, but that doesn’t mean you’ve hit the deadline for contributing to your retirement accounts. You have until July 15 to open and fund a traditional or Roth IRA account. Remember, your contributions might be 100% tax-deductible with a traditional IRA.
An additional deduction can reduce your taxable income for the year. A Roth IRA won't offer such a deduction, but you get the benefit of tax-free withdrawals in retirement. You might additionally be able to qualify for the Retirement Saver's Credit when you contribute to an IRA.
5. Lower Your Taxable Income
Taking above-the-line tax deductions is another way to reduce your taxable income and save you money at tax time. The Tax Cuts and Jobs Act changed some eligible deductions so the ones you're able to claim might be fewer compared to previous years.
The good news is you can still claim an above-the-line deduction for things like student loan interest you've paid and contributions to qualified accounts, including a Health Savings Account if you have an HSA with a high deductible health plan. Be sure to check if some of these tax deductions have been extended, too. You may be able to qualify for more than you think.
6. Talk to Your Financial Advisor
Taxes can be overwhelming, especially if you’re juggling multiple deductions and expenses, or if you're self-employed and run a small business. Your financial advisor knows plenty of strategies to maximize your return and is informed about current IRS rules to help you avoid any future audits or penalties. It’s always worth running your return by your advisor in case any red flags show up.
Have you started to prepare your taxes yet? Remember, if you have questions and need additional help, it’s always best to consult a qualified tax professional—it will be worth it!