How to use the past tax season to prepare for the next.
Have you ever wondered why they made us learn to play the recorder in school? Like seriously, what were they training us for? Fast forward to now, and most adults can probably still play “Hot Crossed Buns” but have very little understanding of systems that play a relatively large role in our lives, like federal taxes.
Every year, about 1.2 million citizens file tax returns and a large majority of these filers show up to a preparer and simply hope for the best. Most people just don’t know how taxes work and pair that with the feelings of fear, intimidation & mystery surrounding the IRS and it’s easy to understand why some dread tax season. For most filers, you are just trying to get it done and over with so you can go back to never thinking about taxes again, well until next year. But what if we think about taxes a little more, what if we prepared and enabled ourselves to walk into next season a little more confident? Before the dust settles & our attention is refocused, lets dive into 3 simple things you can do to make next season a little smoother.
Review Your Federal Withholding
For W-2 employees, your employer sets aside a portion of your paycheck and sends the funds to the IRS on your behalf. In a nutshell, if too much money is withheld throughout the year, you’ll receive a refund. If too little is withheld, you’ll probably owe money to the IRS when you file your tax return. Withholding tax is made up of federal, state, local and FICA taxes (also called payroll taxes). This also includes a 6.2% Social Security tax and a 1.45% Medicare tax. A little over a year ago, the W-4 was revamped and is now a completely different form. If you haven’t viewed your W-4 since you were hired, consider this your reminder! Your withholding is only as accurate as your W-4 so take the time to ensure that this form accurately reflects how you will be filing for this year. If you are married, but normally file using a different status, you should not have “married” on your W-4. Do you normally claim your dependents on alternating years with a spouse or co-parent? Then you should be updating your W-4 accordingly. This small step can set the tone for the following tax season and already place you on the right path.
Start a Spreadsheet
Most filers have trouble recalling just how much they spent throughout the past year on various deductible expenses like childcare, self-employment items and medical needs. I always recommend starting a spreadsheet or notepad on your phone where you are simply jotting down your expenses in real time so you won’t forget them. Most credit card or bank apps, even allow you to categorize or tag items to assist with this tracking. Now when your preparer asks you how much you spent at the dentist last year, you can easily pull this up. This is especially helpful for those who participate in the “gig economy”, this includes ride-sharing, food delivery and any other “side-hustle”. The IRS expects filers to claim any income over $400 from these activities, but most of these gigs come with expenses for the taxpayer that rarely are tracked or claimed. The IRS recently created a site for all things Gig Economy which offers several free resources like a record tracking template. Everything you track won’t be deductible, but it’s always better to have the list ready and allow your preparer to weed through it. You’d be surprised how this one step can make a big difference in your overall return.
These days, being connected with the world is easier than ever. We spend countless hours learning and watching TikTok dances, but we can also leverage social media to help with our taxes. Follow credible financial accounts (like our page, @stclairfinsvcs) and stay connected throughout the year. We often share tips as well as updates and news directly from the IRS. Interacting with your tax preparer outside of tax season might give you “seeing your teacher outside of school” vibes, but I promise the information is worth it. Following accurate & informative financial accounts will not only keep you focused, but it will ensure that you are aware of key changes and upcoming dates before the season even begins.
Overall, taxes might not be something that you think about after April, but this can change. Apply these 3 tips today and try to stay consistent. Giving yourself the best possible odds come next year begins today. If you wait until January to start getting prepared, you’re already late! Here’s to a great year and a successful future tax season!