As you’re finishing up your 2021 tax return, you may be thinking your tax work is done until next spring. But getting a jump-start on next year’s taxes can help you get organized, saving you time and money when April 2023 rolls around.
Here are four steps you can take now to prepare for next year’s taxes.
1. Check your withholding
Adjust your withholding based on how much money you owed, or how much you received as a refund this year. If you faced a large tax bill, you’ll want to raise your withholding to avoid another hefty bill next year. On the other hand, if you received a large refund, you may want to lower your withholding. While a refund can be a nice surprise, overpaying your taxes over the course of a year is tantamount to an interest-free loan to the government. That money could go much further in your own bank account.
Certain life events should also trigger an adjustment to your paycheck withholding, including having a child, getting married, or starting a new job. When you have a child, you’re immediately adding a dependent to your taxes. When you get married, if your spouse makes more money than you, your withholding may go up. But if they don’t, your withholding may go down. If you’re starting a new job with a different salary, your withholding may also change.
2. Contribute to retirement accounts
Contributing to a 401(k) or traditional IRA is one of the best ways you can significantly cut your tax bill. Contributions to these accounts are tax-deductible, meaning they lower your taxable income in the year you make the contribution.
The contribution limits for these accounts increased for 2022, so you may want to defer more of your paycheck to max out your contributions. In 2022, individuals can contribute up to $20,500 in a 401(k). If you are 50 or older you can contribute an additional $6,500 for a total of $27,000.
Contributions to a traditional IRA are also tax-deductible. Those who qualify can contribute up to $6,000 in an IRA. Those aged 50 and older can contribute an extra $1,000. You may not be able to write off your entire contribution if you or your spouse is covered under a retirement plan at work, and you fall within a certain income range.
You can contribute to your IRA up until the tax deadline and have those deductions apply to the previous year. But funding your retirement accounts as early as possible allows more time for your returns to compound, so consider contributing earlier in the year.
3. Check your tax bracket
Rising inflation and a tight labor market mean many people are asking for raises or switching jobs to earn a higher salary. If you’re making more money in 2022 than you did in 2021, you could be pushed into a higher tax bracket. If so, you may want to consider ways you can offset those taxes, like contributing more to retirement accounts or a health savings account (HSA) if you have one.
If you itemize your deductions, you may be able to lower your taxable income through charitable giving as well. An advisor can also provide guidance on strategies like tax-loss harvesting, which involves selling underperforming investments to offset your taxable income.
4. Get organized
Keeping detailed records may not necessarily lower your tax bill, but it can make the process go much smoother when it’s time to file. Get organized for next year’s taxes by designating a folder for work-related expenses, donations to charity, medical records, and last year’s tax forms.
You should also make a habit of tracking any profits made from investments you sold as well as additional sources of income, like rental properties, side gigs, or selling cryptocurrency.
The IRS has a detailed list on their website at IRS.gov of all the documents you’ll need to file your taxes. You can print this out and use it as a checklist throughout the year to make sure you stay on top of your paperwork.
Sources:
https://www.irs.gov/newsroom/irs-announces-changes-to-retirement-plans-for-2022
https://www.irs.gov/individuals/steps-to-take-now-to-get-a-jump-on-next-years-taxes
https://www.irs.gov/newsroom/tax-withholding-how-to-get-it-right