Are you the type who loves surprises?
One surprise you may not enjoy is having to pay more taxes than you anticipated.
Since taxes are a necessary part of life, it’s best to prepare throughout the year so you can limit how much you may be caught off guard at the end of the tax year.
Don’t let the next tax season take you by surprise. Listen in to hear how you can improve your tax situation so that you can rest easy come tax time.
Preparing your taxes can be like a scavenger hunt
Preparing your tax return can be like an anxiety-inducing scavenger hunt. You have to find various documents and then you never know what’s in store for you at the end of the search. Unfortunately, the surprise you get at the end of the tax scavenger hunt isn’t always a good one.
To prevent any unwanted surprises during tax season, you’ll want to prepare as best you can.
Think back to your previous tax year. Were there any surprises that you could avoid next year? What can you do to put yourself in a better position this year?
Setting up proper expectations and preparing throughout the year can help eliminate any surprises when you prepare your next tax return.
Tax surprises to watch out for throughout the year
- Keep track of all income sources – Many times filers get to the end of the tax year and forget about additional income streams. They may miss some 1099s, and forget about changed jobs, pensions, rental income, real estate sales, Roth conversions, or more.
- Keep track of your retirement contributions – Don’t forget about the amount of money that you contributed to your 401K at your last job if you change jobs. You may need to adjust your contributions so that you don’t go over the yearly limit. Pay attention to the rules to ensure that you are saving in the most tax-efficient way. Can you utilize a SEP IRA, a solo 401K, or an HSA? One way to keep track is to check halfway through the year to see how close you are to achieving the max.
- Don’t miss out on charitable deductions – Even though we lost the itemized charitable deduction, you can still deduct large charitable contributions. Check out this episode on charitable giving to see if using a donor-advised fund would work for you.
- Don’t forget about medical expense deductions – Most people don’t qualify for medical expense deductions. If your qualified medical expenses are more than 7.5% of your income, they are deductible. One major expense that could qualify is assisted living. Listen in to learn what to do.
- Don’t miss out on Roth conversions in a lower income year – If you had a lower income year consider making Roth conversions (not to be confused with Roth contributions!). Last year’s bear market made it an optimal time to make those conversions.
- Take advantage of tax loss harvesting – Nobody enjoys selling investments while they are down, but there are advantages to selling at a loss. To learn more about tax loss harvesting, read this article.
- Record your expenses – If you are a business owner, make sure that you keep detailed records of your expenses.
- Make estimated tax payments – This is another important point for business owners. Make sure to pay either 90% of your estimated taxes or 110% of the previous year’s to avoid underpayment penalties.
Nobody likes paying taxes, but they are a side effect of making money, so planning your taxes for the next year is a good problem to have. Listen to this episode to discover what you should be doing differently to ease your tax burden.
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