Tips for a Smoother Tax Season
As we turn the page to 2022, we all start to think about our new year’s resolutions. Perhaps you will consider going to the gym, eating healthier, or spending more time with family. While the topic of taxes may not be the first thing on your mind, this is a great opportunity to consider some tax resolutions to help set yourself up for a successful financial year.
1. Gather and organize your tax documents early
Starting in early January, you’ll begin to see tax documents coming either in the mail or electronically. These will include Form W-2s, 1099s, economic stimulus or advance Child Tax Credit letters, among others. Organize all your documents in one place and peek at last year’s tax return to remember what else you may be waiting on. In addition, there are some documents you might need to complete your return that you will not receive a form in the mail for – such as charitable contributions, medical expenses, or self-employed business information. Of note, even if you do not itemize, there is a special charitable deduction in 2021 (for those who take the standard deduction) of up to $300 for single taxpayers or $600 for married filing joint taxpayers. Remember that the earlier you gather your tax documents, the sooner you can file your return and avoid an extension.
2. Think about tax planning now
The beginning of the year is the perfect time to start thinking about tax planning. For 2022, there are increases to the maximum contribution limits to 401(k)s and HSAs. Make sure if you are wanting to maximize this benefit that you change your payroll elections now so that you aren’t having to catch up closer to the end of the year. Similarly, if your withholding was too much or too little in 2021, make changes to your W-4 with your employer so that you are not running into the same problem next year. In addition, if you are a self-employed taxpayer, or have irregular income, consider taking a closer look at the 2022 tax year now so that you can make necessary changes to estimated tax payments.
3. Consider making IRA/HSA contributions before 4/15
It’s not too late to take action to reduce taxes or maximize retirement benefits for the 2021 tax year. If you haven’t already made an IRA or HSA contribution, you have until the tax filing deadline to do so. For SEP-IRA contributions, if you extend your tax return you have all the way until the extension deadline to contribute. While a Roth IRA contribution does not reduce current year tax due, it is another chance to sock away money for retirement that grows tax-free.
4. Planning for Child Tax Credit changes
One change for a lot of taxpayers in 2021 was an increase in the Child Tax Credit for joint filers making up to $150,000 and single filers up to $112,500. The credit was increased from the normal $2,000 per child to $3,000 for children ages six to 17 and $3,600 for children under six. In many cases, this was partially paid out in advance tax payments during the latter half of 2021. Bottom line: taxpayers who meet these qualifications will see a significant credit on their 2021 tax return. For 2022, the increased Child Tax Credit has not been renewed and it is set to return to the $2,000 amount. This means that you may need to plan for that difference in taxes on your 2022 tax return now, whether that entails changes to your income tax withholding or setting aside the extra money for next year’s taxes.
5. Consider cash needs to pay taxes due
If you’ve done tax planning for 2021, you likely already have an idea of what you may owe with your tax return. In addition, if you make estimated tax payments throughout the year, consider that first quarter payments are due April 15th, the same date as your 2021 tax return payment is due. Set aside the cash now so that you are not scrambling for liquidity as the deadline approaches.
With IRS e-filing set to open up later this month, the 2021 tax season is upon us. The planning and preparation that you do now can make the process more seamless as we get closer to April 15th, as well as set you up for success in 2022. Your wealth manager is happy to answer any questions you have and assist you throughout the tax season. Happy new year and happy tax planning!
At Creative Planning, we deliver a team of credentialed, educated, experienced and action-oriented advisors, including CERTIFIED FINANCIAL PLANNER™ practitioners, certified public accountants, insurance specialists, attorneys and other professionals dedicated to helping you achieve your goals. If you need help with your tax situation, please schedule a call.