6 Things to Remember When Preparing Your Taxes
The Best Ways to Optimize Your Filing Strategy
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 than later. You don't want to be scrambling at the last minute to meet the filing deadline, after all. There are oftentimes questions and unknowns, so getting an early start can allow you enough lead time to ensure a timely filing.
There are a few key things you’ll want to remember 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. At the same time, it eliminated personal exemptions and reduced or eliminated several key deductions. For some tax filers, the standard deduction may result in a lower tax bill this year 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 the standard deduction instead.
2. Provide Dependents’ Social Security Numbers
Whether you have children or file as ‘head of household’ with dependents, you’re going to need their Social Security numbers to claim any applicable tax credits, such as the Earned Income Credit or the Child and Dependent Care Credit. If you’re divorced and claiming a child, make sure that your ex-spouse isn’t also claiming the same dependent or your return could be delayed. If you're planning to claim the child care credit, remember to review the IRS guidelines to make sure those expenses and your dependents are eligible.
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 filing 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, if your return is selected for an audit by the IRS you'll have all the documentation you need to verify your deductible expenses.
4. Contribute to Your Retirement Accounts
You may be filing for taxes incurred in 2019, but that doesn’t mean you’ve hit the deadline for contributing to your retirement accounts. You have until July 15 of this year to open and fund a traditional or Roth IRA account. Remember, with a traditional IRA your contributions may be 100% tax-deductible. An additional deduction can reduce your taxable income for the year. A Roth IRA wouldn't offer such a deduction but you get the benefit of tax-free withdrawals in retirement. Additionally, you may 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 change some of the eligible deductions, however, so the ones you're able to claim may 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 through a high deductible health plan. Be sure to check if certain 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 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!