You’ve just filed your tax return. The last thing you want to think about is next year’s taxes.
Now is the perfect time to get a head start on making your life easier come next tax season.
While you have your previous year’s taxes fresh on your mind, you can figure out ways to optimize your tax information.
This can include figuring out ways to take advantage of tax breaks and ways to organize your tax life a bit better.
Unless you’re a tax expert, you may want to consult a tax professional about some or all of the below concepts. Each person’s tax situation is unique. A tax professional can tell you how these ideas will impact you.
When you filed your tax return, you either got a refund or you owed money. Most people accept the result and move on with life.
They plan for the same refund or amount owed next year.
Instead, you can take action to adjust next year’s tax result to your desired result.
The recent tax law changes also resulted in changes in the IRS withholding tables. This, along with the tax law changes, likely changed the typical refund you receive when you file your return.
If you’re a W-2 employee, federal income tax is withheld from each paycheck.
If you want to change your refund or the amount you owe next year, you can adjust this withholding.
You usually adjust your federal income tax withholding by submitting a new Form W-4 to your employer’s payroll or human resources department. But adjusting withholding can be confusing.
When you fill out a new Form W-4, it’s important you understand how the changes you make will impact your tax situation.
If you have more money withheld and everything else stays equal, you should owe less or get a larger refund next year. The opposite also holds true.
The tricky part:
People have changing tax situations.
If you have a child this year, that will change your taxes.
The same goes for getting a major raise or having a spouse return to the workforce.
When filling out your new W-4, you need to take these changes into account. Doing so will allow you to change your withholding by the proper amount to get the refund you desire when you file your taxes next year.
Separate Personal and Business Expenses
If you run a business, one of the best ways to make your taxes easier next year is completely separating your personal and business finances.
Open a separate bank account and, if you’d like, a separate credit card. Then, make all business transactions on these separate accounts.
Never make personal transactions on these accounts.
When you go to file your taxes next year, you won’t have to spend hours combing through a combined set of bank accounts and credit cards trying to remember which expenses were personal and which were business.
Some business types require you to keep your personal and business finances separate.
If you don’t, you may pierce the corporate veil. Doing so could take away the liability protections some business types offer.
When this happens, your personal assets may be at risk should something happen and your business gets sued.
Create Filing Systems for Tax Info
While having a shoebox of receipts is better than no tax filing system at all, chances are you realized you weren’t as organized for your taxes as you would have liked this year.
Rather than repeat the same process for next year, take this opportunity to figure out what would work best for you.
You could set up email tags for important electronic documents that could impact your taxes throughout the year. This can save you hours of searching through emails to find that one important document you need at tax time.
For paper documents, find a filing system that makes your life easier. You can scan important documents into a specific folder on your computer. If you do this, make sure to back the documents up in case your computer crashes.
Others may prefer the old fashioned way of setting up file folders. You can set up a single folder for your personal tax information and another folder for your business tax information.
If you want to get more complex, you can set up a folder for each quarter or each month. You’re likely better off breaking up the year into multiple folders if you have a ton of information you need to keep track of.
But how do you know what to file away?
For starters, look at the information you used for this year’s return.
If you used it this year, file new information of the same type away for next year.
There are new events that will require you to file away information, as well. If it’s a big event, it never hurts to file it just in case you need it.
If you have a question about what to keep, ask your tax professional.
Review Your Prior Year Return for Tax Saving Opportunities
While last year’s tax return won’t predict next year’s tax return perfectly, it’s a huge head start.
- Figure out what tax items from last year you’ll have again next year.
- Look at the tax forms to figure out where you might have some major changes.
This will give you a general idea of where you’ll fall income, credit, and deduction wise next year. Taking the time to project next year’s tax situation gives you plenty of opportunities to tax plan for next year.
Standard vs. itemized deductions
First, you should consider whether you’ll be taking the standard deduction or itemizing deductions next year. If you itemize every year, this doesn’t present a huge planning opportunity.
If you usually take the standard deduction but know you’ll itemize, you have an opportunity.
Let’s take a look at a 3-year period:
It’s currently year 1, which you’ll take the standard deduction. You’ll also take the standard deduction in year 3.
The opportunity lies in year 2, where you know you’ll take itemized deductions.
You can delay expenses that qualify as itemized deductions from year 1 until year 2 when you’ll itemize to get a bigger tax benefit.
You can also accelerate itemized deduction transactions from year 3 into year 2. While this will require you to spend more in year 2, it gives you a bigger tax benefit on the expenses you’d make anyway.
Other deductions and tax credits
Next, take a look at other deductions or credits you think you’ll qualify for based on your projected tax situation.
There may be certain deductions or tax credits you can take, such as those for traditional IRA contributions, that you weren’t able to take last year.
These could help you lower your tax bill next year.
This is where consulting with a tax professional can be well worth their cost.
Determine If You Need to Make Estimated Tax Payments
If you owed money this tax season, one reason you may have owed is you didn’t make quarterly estimated tax payments when you should have.
If your only income is from a W-2 job, you shouldn’t have to make estimated quarterly tax payments as long as your withholding is set up correctly.
Many people have income from other sources that tax isn’t withheld from. This can include interest, dividends, and any income earned from your business, consulting or contracting work.
In general, you should make quarterly estimated tax payments if you expect to owe at least $1,000 in taxes after you subtract any withholding or refundable credits and either one of the following applies:
- You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax shown on your tax return for the current year
- 100% of the tax shown on your prior year tax return
There are exceptions and special rules for certain people, so check with your tax professional if you’re unsure if you need to make these payments.
Alternatively, you can read the instructions for Form 1040-ES, Estimated Tax Payment for Individuals.
Consult a Tax Expert Before Major Changes
One thing that drives tax preparers crazy is when a client makes a major life change and then consults the tax preparer after the fact while asking how to optimize the situation.
With that said:
If you’re going to make a major life change that will impact your taxes, the time to talk to your tax professional is before you make the change.
Often, you can’t plan effectively around major changes for tax purposes after they happen.
Some life changes, such as having a child, aren’t something you should prioritize based on tax planning. Other events, such as buying or selling a house or investments, could be optimized by just waiting a few days or months in some cases.
The worst part:
You may not know that a few days or months could end up costing you thousands in taxes. This is yet another reason it’s important to keep in touch with your tax professional throughout the year.
Get Started Earlier Next Year
While the above tips could help you be in better shape when you’re ready to file your taxes, getting started earlier in tax season will make life easier on everyone next year.
Don’t wait until April rolls around to head to your tax preparer’s office or start using tax software to file your return yourself.
Tax preparation software is often cheaper the earlier you file in tax season. In many cases, the prices rise until April 15th when you’re basically paying full price.
If you head to a tax preparer’s office or use a Certified Public Accountant, the wait times likely get longer the closer you get to tax day.
Heading in as early in tax season as possible will help you avoid these wait times in many cases.
Getting started earlier will help you get your refund earlier, too.
Alternatively, it could give you time to save up for any amount you’ll owe. As long as you won’t owe interest and penalties, you can delay your payment until the April 15th tax return deadline without consequences.
Take Action Now
Getting organized for next year’s tax return now could pay off next year.
It takes a bit of time to get organized and plan.
That time will likely be saved when you aren’t scrambling to file your return next year right before the tax deadline.