Just Filed Taxes? Here Are 7 Tips From Tax Experts on What NOT To Do Next Year
With Tax Day now in the rearview mirror for most Americans, you may think you can let off the accelerator and start to coast. However, if you want to make the next tax filing season easier on yourself, it’s important to establish good practices now rather than scrambling next year.
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In particular, try to avoid the following tax mistakes that can make your situation harder to manage. Whether it affects your total tax liability or makes the filing process more cumbersome, here are seven tips from experts on what not to do over the course of the next 9-12 months.
Ignore Your Withholdings
If you got a big tax refund this year, you might feel like that’s a win. However, you might have given an unnecessary interest-free loan to Uncle Sam. If you want more of that money in your bank account as you get paid, rather than waiting until next tax filing season, don’t ignore your withholdings.
The same can be said for taxpayers who ended up owing taxes this year, as you don’t want to pay penalties or not have enough saved to afford your tax bill.
“If you had an excessive over- or under-withholding in 2023, you might need to adjust your withholding taxes for 2024 by submitting the W4 form to your employer,” said Dr. Lei Han, CPA, associate professor of accounting at Niagara University.
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Skip Estimated Tax Payments
If you had a big tax liability in 2023, part of the problem may have been that you overlooked estimated tax payments.
“For those taxpayers with significant self-employment or gig-economy income, then estimated tax payments are the most logical way to get money set aside for 2024 income tax,” said Adam Brewer, a tax controversy attorney at AB Tax Law.
If you just filed your taxes, your tax software or accountant might have provided you with vouchers to send in quarterly estimated tax payments. But don’t feel like you have to follow that exactly.
“The quarterly estimated tax deposit doesn’t work well for most taxpayers. Just because the vouchers are set up for quarterly deposits doesn’t mean you can’t send them in more frequently. Make smaller deposits weekly, monthly, or whenever you are able. This time next year you’ll be happy you paid estimated taxes when you don’t get hit with another big tax bill,” said Brewer.
Let FSA/HSA Money Go To Waste
While contributing to a flexible spending account (FSA) or health savings account (HSA) can help lower your tax bill, you don’t want to make the mistake of letting that money go to waste or not using the funds to your full advantage.
“If your FSA funds don’t carry over into the next year, don’t forget to spend them,” said Cindi Turoski, CPA, partner, The Bonadio Group.
While HSAs don’t have the same use-it-or-lose-it rules, consider how to best manage that account this year for maximum tax savings. “Consider paying for current medical expenses out of cash flow and letting your HSA compound tax-deferred for distributions later in life,” she noted.
However, you should also “save your receipts for unreimbursed expenses you incurred since you’ve had the HSA, in case you want a distribution sooner,” Turoski added.
Skip Tax-Loss Harvesting
If you owed taxes due to capital gains, you might try to avoid or minimize that tax liability next year by using tax-loss harvesting strategies this year.
“Harvesting losses in your non-retirement investment accounts to be used to offset any capital gains realized this year is a smart tax strategy. Better yet, you can deduct up to $3,000 of excess capital losses beyond that and carry over the balance to offset future years’ capital gains,” Turoski explained.
Tax-loss harvesting can be a complex investment strategy, so you might want to work with an accountant or financial planner who can help in this area. That said, some investment platforms have built-in tax-loss harvesting features that you might explore.
Overlook Annual Exclusions for Gifts
This issue might not apply to the average person, but taxpayers with significant assets might look to gift substantial sums, such as to their children or grandchildren, while minimizing taxes.
Annual exclusions for gifts — meaning the amount that can be given without requiring extra tax paperwork and potentially a tax liability — often change each tax year. For calendar year 2024, the limit has been increased from $17,000 to $18,000, or $36,000 for married couples in many cases.
You don’t want to overlook these limits if you want to pass on money without incurring taxes on those gifts. Turoski said, “Plan to make annual exclusion gifts by year-end. These add up over time for reducing your taxable estate and you can enjoy seeing them receive your gift during your lifetime.”
Fall Behind on Recordkeeping
It’s easy to procrastinate with taxes, but you’ll save yourself time and possibly money by keeping up with recordkeeping throughout the year. Especially if you have a more complex tax situation, such as handling business taxes alongside personal taxes, you don’t want to delay.
“Start the organization process as soon as you file this year. Since the filing is so fresh, right now is a good time to think about what you need to gather and how you can make it easier for next year,” said Ben Richmond, U.S. country manager at Xero.
Miss Out on Small Business Deductions and Credits
Self-employed individuals and small business owners shouldn’t wait until next year to figure out what deductions and credits they’re eligible for. Start planning now.
“For example, business equipment purchases and home office expenses are things you should be tracking throughout the year so you don’t miss out on opportunities when tax season comes. While they may make your taxes a little more complex, a lot of small business owners miss out on maximizing these and getting money back in their pockets,” Richmond said.
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