As tax season approaches, many people start to feel overwhelmed by the task of gathering all the necessary documents and preparing their tax returns. The key to avoiding last-minute stress is organization. By organizing your finances ahead of time, you can make the tax filing process smoother and ensure you don’t miss out on potential savings. Here’s how to get your finances in order before tax season begins.
Review Last Year’s Tax Return
Before you dive into organizing this year’s documents, take a look at your tax return from last year. This will give you a solid foundation and help you identify which forms and deductions were relevant to you in the past. Comparing last year’s return with your current financial situation will help you ensure you don’t miss any important documents or tax opportunities.
Gather All Relevant Documents
One of the most time-consuming parts of tax preparation is gathering all the necessary paperwork. Start collecting these documents early to avoid the last-minute scramble:
W-2 Forms: If you’re an employee, your employer will send you a W-2 form detailing your income and taxes withheld.
1099 Forms: If you’re self-employed or earned income from freelance work, you should receive various 1099 forms showing income from clients or other sources.
Bank and Investment Statements: Gather your bank statements, investment income reports, and dividend statements.
Mortgage Documents: If you own a home, your mortgage company will send you a 1098 form detailing mortgage interest payments.
Receipts for Deductions: If you plan to claim deductions for business expenses, charitable donations, medical expenses, or education costs, gather all relevant receipts and records.
Health Insurance Forms: If you have health insurance through the marketplace or your employer, gather forms like the 1095-A or 1095-C to report coverage.
By gathering your documents now, you can avoid scrambling for them later when the deadline is looming.
Track Your Expenses
If you’re self-employed, own a business, or have other income streams, keeping track of your expenses throughout the year is critical. You can use accounting software like QuickBooks, or simply maintain a detailed spreadsheet, to track your business expenses, mileage, and other tax-deductible costs. This makes it easier to calculate your deductions and ensures you don’t miss anything when filing.
For personal expenses, you should also be mindful of any potential deductions, such as charitable contributions, medical expenses, or home office costs, which can be used to lower your taxable income. Having a record of these expenses will help you file your return accurately.
Set Up a Dedicated Folder for Tax Documents
To keep things organized throughout the year, set up a dedicated folder (either physical or digital) specifically for your tax-related documents. As you receive documents throughout the year, file them immediately. This can include receipts, invoices, statements, and any forms you receive. By keeping everything in one place, you’ll have easy access to the documents when you need them.
If you prefer going digital, many tax preparation apps allow you to upload documents directly from your phone. Consider scanning or photographing receipts and forms and storing them in cloud storage or a tax app.
Review Your Tax Withholdings
Tax season is the perfect time to assess whether enough taxes are being withheld from your paycheck. If you received a large refund last year, you may want to adjust your withholdings so that you’re not overpaying. Conversely, if you owed money last year, you may want to increase your withholding to avoid a similar situation this year.
To adjust your withholding, update your W-4 form with your employer, and make sure the changes take effect before year-end. This way, you can avoid a surprise tax bill in the future.
Consider Tax-Advantaged Accounts
Contributing to retirement accounts or other tax-advantaged accounts before the end of the year can reduce your taxable income. If you’re eligible, consider contributing to:
Traditional IRAs or 401(k)s: Contributions to these accounts are often tax-deductible.
Health Savings Accounts (HSAs): Contributions to HSAs can be deducted from your taxable income.
Flexible Spending Accounts (FSAs): FSAs allow you to set aside pre-tax money for medical expenses.
Contributing to these accounts before tax season will help lower your taxable income and potentially increase your refund.
Keep Track of Tax Law Changes
Tax laws change frequently, and it’s important to stay informed about any new rules that could impact your tax return. For example, changes to tax rates, deductions, and credits can all affect your filing.
Consider working with a tax professional who can keep you updated on relevant changes. You can also check official IRS updates and resources to ensure you're aware of any changes that may affect your return.
Set Up a Tax Prep Timeline
Start planning ahead by creating a timeline for preparing your taxes. Schedule time to review your documents, complete your return, and file it before the deadline. The earlier you start, the less stressful the process will be. If you’re working with a tax professional, book your appointment early to ensure you have plenty of time to discuss any questions or concerns.
Consider Professional Help
If your tax situation is complex—such as if you’re self-employed, own a business, or have multiple streams of income—it may be worth hiring a tax professional to help you navigate the filing process. A tax professional can help ensure your return is accurate, maximize your deductions, and help you avoid any mistakes that could trigger an audit.
By organizing your finances ahead of tax season, you can reduce stress and ensure that your tax filing process goes smoothly. Start gathering documents early, track your expenses throughout the year, and consider professional help if needed. Proper organization is key to making tax season a breeze, so take the time now to set yourself up for success.