Get Ahead of Your Taxes: 5 Tips to Prepare for Tax Seasonin Managing Money & Credit
Five tips on preparing for the 2023 tax season throughout the year.
Preparing a year in advance of the next tax season can empower and enable you to best manage the process. If filing your taxes has had your head spinning and making you wish you had been more organized and educated ahead of time, you’re not alone. Read on for how to prepare for the 2023 tax season all year long.
Five (5) Tips for Preparing for 2023 Tax Season
Taxes shouldn’t just be on our radar once a year; rather, they should be top of mind throughout the year. Use these five tips to get a head start on your 2023 taxes!
1. Systematically File Your Documents
There is a lot of information needed to properly file your taxes each year. And it’s best to have them all secure in one location, either in hard copies or digitally on your computer. Throughout the year, check in frequently to make sure you have all of this information handy and organized.
In addition to your (and your spouse’s, if applicable) social security number, tax ID number, and identity protection PIN, you’ll want this information filed for tax time:
You’ll want the social security and tax ID numbers of your dependents securely documented, as well as childcare records and any income your dependents earn. If a custodial parent has released their right to you to claim a child, you’ll need the information from Form 8332 on hand.
You may be aware that your W2 is needed for filing your taxes. But, if you have one or more sources of income throughout the year, you may need additional documentation. Below are common forms of income and their related tax documents.
- Traditional paycheck/income (W-2)
- Unemployment (1099-G)
- Self-employment (1099, Schedules K-1, 1099-MISC, and 1099-NEC)
- Rental income (document any expenses related to your rental investment)
- Retirement income from an IRA, pension or annuities (1099-R), social security (SSA-1099) or RRB-1099
You’ll also need to file information related to any income you receive from investments or dividends.
- Selling stocks or property (1099-B, 1099-S)
- Health Savings Account reimbursements (1099-SA)
- Cryptocurrency sales
- Dates of sales, acquisitions, or expenses related to investments
A new tax-reporting rule for 2023 relates to any income over $600 received through peer-to-peer applications (including Venmo and PayPal). The IRS originally planned to implement this rule for the 2022 tax season, but it was delayed one year. If you receive payment through these applications, note that you may receive a 1099 next tax season and will be required to pay the appropriate taxes related to the income received.
The IRS has a comprehensive list of income types here, starting on topic 401. It’s recommended to keep track of income in real time throughout the year so you’re not scrambling to remember one-time projects, stock sales, or a season of unemployment income.
Mortgage and Home Documentation
If you’re a homeowner, you’ll want to keep track of any money you pay for interest on your loan, mortgage insurance, and/or prepaid points. You should receive Form 1098 in the mail when tax season arrives.
If you will be a first-time home buyer in 2023 and receive a buyer incentive from a government agency, keep all of your mortgage credit certificate paperwork on hand so that you can file IRS Form 8396. You will also want to properly store your settlement statement, which you receive at closing. As a homeowner, you’ll want to ensure you are keeping track of your property tax payments, which is important to have in the event that you’re ever audited by the IRS.
Additionally, you should keep and file your receipts for any home repairs you make throughout the year. Although they cannot be directly deducted from your taxes, they may be able to help you offset capital gains when you go to sell your home. Finally, keep receipts and records for any energy-efficient improvements you make to your home, as some states provide tax credits for this.
If you plan on itemizing deductions (more on this later on), you’ll want to keep your receipts organized and filed. Documentation, including the name of the organization and the amount and date you donated, should be recorded for any donation you make via check, cash, or other monetary gifts.
2. Take Advantage of Tools & Resources
The IRS is truly a good resource to start with, as they provide detailed information to aid Americans with tax preparation. The IRS also provides a service called IRS Free File where those with an Adjusted Gross Income of less than $73,000 can receive free guided tax preparation for their federal returns.
Professionals at companies like TurboTax and H&R Blocks are also available to help educate you and file your tax paperwork. Members of Lafayette Federal Credit Union receive special savings when they file with these companies.
3. Understand Your Deductions
Because there are many potential deductions available to taxpayers, it can be easy to feel overwhelmed by them. A deduction is not a tax credit, but rather a monetary amount (based on your tax filing status) that reduces your taxable income.
Itemized Versus Standard Deductions
The IRS is raising the amount for standard deductions in response to increased inflation. The standard deduction for the 2023 tax year is:
- Single and married filing separately: $13,850
- Head of Household: $20,800
- Married Filing Jointly: $27,700
Standard deductions are a simple option for individuals and couples who do not have or want to claim any itemized deductions.
Importantly, if you and/or your spouse have individual deductions that could put your taxable income lower than the standard deduction, itemizing may be the best option for you. When considering whether you should itemize or not, review your yearly payments for:
- Mortgage interest
- State and local taxes
- Charitable donations
- Medical and health care expenses that exceed 7% of your adjusted gross income
Many people find that taking the standard deduction benefits them financially and saves them time with filing. There are, however, many deductions you can still qualify for without itemizing, including:
- Student loan interest: This can be a welcome relief for those of you paying down hefty student loans for yourself or your children. There are income restrictions, but certain qualified filers can deduct up to $2,500 in student loan interest.
- Traditional IRA contributions: There are income restrictions here as well, but qualifying taxpayers who contribute to a traditional retirement plan (not including Roth IRAs) may be eligible for a deduction for contributions made. Making regular contributions throughout the year will not only boost your retirement savings, but could also have the added benefit of helping you at tax time!
- Health Savings Account (HSA) contributions: HSA accounts are often praised for being triple tax advantaged, and rightfully so! Contributions are pre-taxed (or tax-deductible), balance growth is tax-free, and you can use the money tax-free for qualified health expenses. These accounts are wonderful options for both individuals and families and can be an excellent supplement to your retirement planning (and tax planning strategy!)
4. Learn about Tax Credits
Learning about the different tax credits available to you and your family can give you a higher refund come tax season, or at least allow you to deduct less from your paycheck throughout the year. Common tax credits include:
American Opportunity Tax Credit: This credit can be claimed by individuals (with a modified adjusted gross income up to $80,000) and families (with a modified adjusted gross income up to $160,000) paying for higher education, for up to four years. The amount of the credit is based on income but some can receive up to $2500 for qualified education expenses such as tuition and course materials.
The Lifetime Learning Credit: This credit benefits students paying for post-secondary education. This credit can qualify for any year of post-secondary education (not just the first four years) and can even be available for people not pursuing a degree. This credit can be as high as $2,000, depending on income.
Child and Dependent Care Credit: This tax-saving credit is available to people who pay for childcare (or other types of dependent care) when they are looking for work or working. This can help offset the cost of care by saving you hundreds, or even thousands, of dollars when you file your taxes.
5. Ensure You’re Withholding Tax All Year
You’ll have a lot of information to base next year’s taxes on after filing your taxes this year. For instance, if you receive a really large refund or get stuck with an unfortunately high tax bill, you’ll likely want to make changes for next year.
If you’re an employee who receives a W-2 form, review your W-4 form to ensure you’re taking out enough money from each paycheck to cover your tax liability. If you’re an independent contractor or self-employed, consider setting up direct deposit monthly so that you are regularly setting aside the appropriate amount of income.
If you are under the official retirement age and withdraw funds from a retirement account, you may be hit with a considerable tax bill. Similarly, if you sell largely-valued assets, you can also owe big come tax time.
To mitigate any surprises next tax season, regularly review your tax liability status. Reviewing how much tax you owe and how much you’ve contributed every quarter or six months will help you stay on track.
Preparing for 2023 Tax Season: When Tax Season Arrives
Once the 2023 holiday season has come and gone, it’s a great time to finish the hard work you’ve put in all year. You can start by requesting your previous tax records from the IRS. This will ensure there are no inaccuracies, which are a common trigger for IRS audits.
You should also take this time to:
- Plan on filing early. This will increase your chances of receiving your refund sooner, or give you more time to prepare your payment if you owe money. Filing early will also give you a grace period, if something unexpected happens.
- Book your appointment. If you plan on using a tax professional to help you file your taxes, book your appointment early. This will allow you to choose an appointment that best suits your schedule and ensure you’re staying ahead of tax deadlines.
- Update credentials. If you plan on using an online tax filing system, log in early and consider updating your credentials. Changing your password and ensuring all your personal information is correct can help prevent fraud and save you time. As your tax documents become available, either through the mail or your email, upload them right away.
- Contact others. If you worked as an independent contractor or performed one-time jobs, you should make certain that whoever hired you files the necessary paperwork. Contact anyone you performed work for to ensure you receive the correct documentation in a timely manner.
Take Control of Your Finances with Lafayette Federal
At Lafayette Federal Credit Union, we understand the stress of tax time. As your financial partner for life, we keep our members updated on the latest tax tips/tools to maximize your money, and offer exclusive discounts on tax preparation services, when it comes time to file.