Rushing to file your tax return before the deadline may lead to mistakes that could have been avoided. There are steps you may take to plan and prepare before filing your taxes. Here are seven steps designed to help tax filers save money and avoid surprises when filing this year.
Step #1: Figure Out Your Filing Status
How will you file this year? Single? Jointly? Head of Household? It’s an easy question for some, but if circumstances have changed due to marriage, divorce, separation or a passing, your status will change for the filing period. Identify what status you will be listing for this filing period early because it will greatly impact the rest of your tax return.
Step #2: Organize Your Information
Even if you work with a tax professional, using tax software helps get all your paperwork together and answer some basic questions. Your preparer may appreciate the organization, and you may be able to save time when working with them.
Step #3: Go Digital
You may find it easier to work through tax documents when they are scanned and organized by topic or deduction type. This is something most people can do on their own. Create a digital folder on a flash drive and have everything ready to file your taxes. Most financial documents provided by a bank, credit card company or even stores can be downloaded, enabling easy access to important financial documents.
Step #4: Hunt Down All Your Charitable Donations
If you opt to take an itemized deduction, your qualifying charitable donations can count towards a tax deduction. You can only claim this deduction if you have proof, typically in the form of a donation receipt. Many people have them, but like other receipts, aren’t sure where they placed them, often having stuffed them in drawers or file-piles. Take some time now and do a thorough sweep for any relevant receipts or documents.
Step #5: Decide Between Standard and Itemized
Standard deductions for the 2021 tax year are:1
- $12,550 for individuals and married filing separately
- $25,100 for married filing jointly
- $18,800 for heads of household
When itemizing your deductions, it’s unwise to take a deduction on a tax return simply because you believe you’re eligible. There should be a supporting document that objectively validates the deduction. Whether that document is a receipt, proof of address, membership, or any other category, you want your paperwork to be able to back up your claims. In an audit there won’t be time for guessing; you either have the proof or you don’t.
Step #6: Catch Up on Retirement Savings
If you have an IRA, you can still adjust for the prior year up until you file your tax return. If you have not maxed out your contribution limits for 2021, you and your financial planner may find it advantageous to post your retirement contributions to the 2021 tax year, even if it is the beginning of 2022. You may contribute up to $6,000 for those under 50 and $7,000 for those 50 and older to your IRA.2 This can help maximize your deposit ability for the next year and may reduce your taxable income for 2021.
Step #7: Avoid the Estimated Tax Penalty
If you are a business owner or otherwise earn income that does not have taxes automatically withheld from an employer, estimated tax payments may be required or recommended. While it’s too late to make estimated tax payments for the 2021 tax year, now is a good time to determine if you should be making them for 2022.
Estimated taxes may be required or recommended for those who earn income through:3
- Self-employment income
- Capital gains
Make sure to take your time when filing your 2021 taxes. Double-check this list, and more importantly, contact a tax professional who can help stay on top of recent tax changes for yourself and your business.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.