As the holidays come and go and the year draws to a close, businesses and individuals alike turn their attention to finances. While it can be tempting to bury your head in the sand when it comes to your personal or business taxes, it is best to start getting organized sooner than later, particularly in the wake of Trump’s Tax Cuts and Jobs Act, which brought monumental changes to the tax code. The Act, which caps state and local deductions, limits the deductibility of home equity debt, and changes the tax brackets, gives taxpayers much to consider when it comes to organizing their taxes. As such, it is never too early to start compiling your financial information.
Here are our seven tips to help you prepare your taxes well in advance of Tax Day.
#1: Check out your paycheck.
Double-check the withholding amounts on your paycheck, as the Act has revised the withholding tables. If you are having too little withheld, you will owe Uncle Sam come April 15. On the other hand, if you withhold too much, you will be entitled to a refund. To determine whether you are withholding the proper amount, consult the IRS tax withholding estimator. This is particularly important if you made a significant transition in 2019, like a job change or a new business venture.
#2: Decide who will prepare and file your taxes.
If 2019 brought a significant status change like a marriage or new employment situation, your taxes may look a bit more complicated than they did in the past. If this is the case, consider hiring an accountant, even if TurboTax proved sufficient in the past.
Keep in mind that some professionals may increase their rates as tax season approaches – not to mention, they will be much harder to access as their “busy season” sets in. As such, reach out to your preparer before the end of the year to ensure you will have the help you need.
If your income falls below a certain threshold, consider organizations like Free File Alliance, a company that partners with the IRS to help individuals file their taxes. Alternatively, explore the IRS online location tool to seek free preparation services in your area.
#3: Max out your IRA or 401k contributions.
Padding your retirement accounts in the fourth quarter will reduce your taxable income for the year, which will also reduce the taxes you owe. For 2019, contribution limits for 401ks are $19,000, plus $6,000 in catch-up contributions for those who are aged fifty and over. Limits will increase by $5,000 apiece in 2020. For a traditional IRA through a broker or bank, limits for 2019 are $20,000 plus $6,000 in catch-up contributions. If it is financially feasible for you, consider making these maximum contributions to reduce your tax bill.
#4: Protect yourself from tax scams.
As tax season approaches, you may receive phone calls from companies purporting to be the IRS – but rest assured that they are not. Generally, the IRS will only communicate with you through U.S. mail and as such, arbitrary phone calls are likely bogus. Additionally, avoid tax preparers who promise you a “bigger refund,” as few reputable accountants will make these claims.
To create additional layers of protection, consider setting up safeguards like direct online payments to the IRS. Additionally, consult the IRS list of registered preparers to ensure yours is legitimate before sharing your personal financial information.
#5: Consider the benefits of bunching your deductions.
The threshold for standard deductions has nearly doubled, so it can be hard to itemize. To help, consider “bunching” your deductions to meet the new threshold. Bunching is a practice that entails pushing deductible expenses – like charity donations or mortgage payments – into the same calendar year so that you can itemize them. For instance, you may consider prepaying your January mortgage payment in order to meet the threshold for 2019. As with any significant financial decision, however, consult your accountant or financial planner before taking this step.
#6: Review your medical expenses.
If you accrued substantial medical expenses in 2019, you may be entitled to deduct certain out-of-pocket expenses related to your treatment, such as transportation, lodging, and home healthcare. Speak with your tax preparer or an experienced tax attorney to determine which – if any – expenses are deductible.
#7: Pay attention.
If the IRS contacts you because you failed to file a return or pay taxes on time, you may face penalties – most significantly, losing your property. As such, do not ignore the IRS or delay paying your taxes. Additionally, once you have paid, save any and all correspondence with the IRS, as well as your U.S. Post Office records, in the event you need to prove that you made timely payments.
Tax Planning for the Future
To ensure you are equally organized for the next tax year, start a habit of tracking – and keeping – all of your financial records. Compile W2s, 1099s, medical expense receipts, charity donations, canceled checks, previous year returns, and other vital financial records so that you are prepared in the event of an audit. It is a good practice to keep these records for at least three years. For your own peace of mind, you may opt to keep them even longer.
Experienced Tax Attorneys
Wilson Ratledge assists clients in financial and tax planning. There are numerous considerations to evaluate before making significant financial decisions. Our experienced tax attorneys can discuss your options and help you decide how to manage your money wisely. Contact one of our attorneys today at 919-787-7711 or via our contact form below.