As tax season approaches, many find themselves racing against the clock. With W2 forms arriving by the end of January, the scramble to locate and organize receipts can transform into a stressful weekend filled with anxiety about filing your tax return. Ultimately, the entire process tends to feel rushed and overwhelming—an annual task most would prefer to avoid.
But what if you could lighten the load of tax season?
The key to a smoother tax experience is to start your preparations now, rather than waiting until the last minute. If you’re looking for a seamless tax season, consider taking the following steps today.
Compile a list of required documents
One of the most irritating aspects of preparing your taxes is realizing you’ve overlooked an essential document after believing you had everything ready. It’s even more frustrating when you’re uncertain about how to obtain what’s missing.
To avoid this situation, take the time to examine what information you’ll need for filing, so you have adequate time to collect all required documents well in advance of Tax Day. Specifically, gather:
- Your previous year’s tax return
- The Social Security or Tax ID numbers for each household member
- Income documentation for all household members
- Receipts for deductible expenses
- Proof of any taxes paid throughout the year
Creating a checklist of the necessary documents and marking them off as you compile them will ensure you’re completely prepared when you sit down to file. (See also: The 7 Most Common Tax Questions for Beginners, Answered)
Sort your receipts
Tracking down tax-related receipts throughout the year is often a daunting challenge. Many people tend to toss their receipts from work expenses, charitable donations, mortgage payments, medical costs, and interest statements all into one folder or box to sort out later.
Now is the perfect time to pull out your receipts and categorize them. By having them organized now, it will be easier to handle the stragglers as the year closes out, and this practice can also help you develop a habit of organizing them as you receive them throughout the year.
Assemble your paystubs
While most tax filers will receive a W2 or 1099 from their employer(s), gathering your paystubs towards the year’s end is wise for an accurate understanding of your income. This measure will help you spot any discrepancies on your W2 or 1099 forms once they arrive, allowing for corrections well before the IRS deadline.
Additionally, examining all your paystubs in one go gives you insight into your federal and state tax withholdings for the year and any pretax contributions made to your 401(k) or IRA.
Review your W4 form
Another advantage of reviewing your paystubs now is the opportunity it provides to reassess your W4 with your employer.
Your W4 dictates how much tax is withheld from your paycheck. If you anticipate receiving a substantial refund this year, consider adjusting your withholding allowances now to keep more of your paycheck during the year. Conversely, if you’re worried about potentially owing taxes due to insufficient withholding, it’s wise to modify your W4 to prevent similar issues in the next year. (See also: Are You Withholding the Right Amount of Taxes from Your Paycheck?)
Increase contributions to your retirement account
If you have access to a tax-deferred retirement account like a 401(k) or IRA, this is a good time to assess how much you’ve contributed this year and consider raising that amount.
Currently, individuals under 50 can contribute up to $19,000 to a 401(k) and up to $6,000 to an IRA. Every dollar invested in these accounts reduces your taxable income.
It’s an ideal moment to maximize your contributions for 2019. You have until the end of the calendar year to maximize your 401(k) contributions, but you can continue contributing to your IRA until April 15, 2020.
Forming the habit of increasing your contributions now can be advantageous for reaching the maximum for 2020, which will be rising to $19,500 for 401(k) plans, while the IRA limit remains at $6,000. (See also: 8 Tax Return Mistakes Even Smart People Make)
Consider your refund strategy
If you expect a tax refund this year, now is the time to contemplate the best way to utilize those funds. We often think of tax refunds as “free money,” although they are merely a return of our earnings. This mindset can lead to impulsive spending on luxuries like vacations or gadgets.
While enjoying your tax refund isn’t wrong, evaluating your financial circumstances now can help identify the most judicious use of your money. Could you pay down some debt with your refund? Or perhaps there’s a significant goal you’re saving for—like a house down payment—that could benefit from this cash influx?
Pondering the best use of your tax refund ahead of time increases the likelihood of making wise decisions once the money is in your hands. Once you receive it, the temptation to spend frivolously can be significant.
Reduce stress during tax season
Getting a head start on your tax preparation not only simplifies the filing process but also positions you better for financial planning in the following year. Kick off 2020 on a solid financial note by initiating your tax preparations early.
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