How Much Preparation Can You Do for Taxes at the End of the Year?
With the new year just around the corner, now might be the time to prepare for tax season. While this process can be cumbersome and lengthy, knowing how much you can or should do to prepare for the new tax season can give you a leg up and alleviate some stress.
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“While taxpayers should always consult a tax professional for individual advice, there are basic steps people can take now to make tax filing less time-consuming and less stressful this spring — and sometimes result in less taxes owed,” said consumer finance expert Michael Micheletti, chief communications officer at Unlock Technologies.
Here are some steps you can take and how you might want to prepare, according to experts.
Analyze Your Income
Regarding taxes, how you earn money can be as important as the amount you make.
In turn, review your 2023 income and your projections for 2024, said tax and wealth expert Tom Wheelwright, CPA, CEO of WealthAbility and advisor to Robert Kiyosaki of “Rich Dad Poor Dad” fame.
And if you are anticipating any significant changes, pay attention to what this means for your tax bracket.
“Many accountants will encourage you to push income into a future year to postpone tax payments, but this isn’t always the best option,” he said, recommending working with a CPA who takes the time to understand your wealth goals and will help you create a long-term strategy.
“Are there opportunities to shift your earnings away from a salary and toward investment income? Do you have a business or a side hustle? Are you planning to make new investments or sell any existing investments? All of these facts shape your tax.”
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Clean Up Your Bookkeeping and Documentation
According to Wheelwright, if you’ve been too busy running your business or managing your life and have been lax about keeping good records, it’s time to clean that up.
“Having good records of your revenue and expenses is essential,” he said, “and the Internal Revenue Service requires comprehensive documentation for any tax deduction.”
Maximize Your Deductions
This is another important step, Wheelwright noted, saying that when he reviews someone’s tax returns, he often finds they’ve paid the government more money than they needed to because they missed deductions.
“Once your bookkeeping is in order,” he said, “review every expense and ask your tax advisor what you must do to make it deductible. Some of the most commonly missed are related to home office and travel expenses.”
Check Your HSA and FSA
According to Micheletti, this is the time to make sure you’ve contributed as much as you can for the year. Most contributions will be tax deductible on federal returns; withdrawals for qualifying expenses are tax free.
“Check with a tax advisor for how contributions work on your state’s tax return,” he said.
If you have an flexible spending account (FSA), be sure to check your balance — and check with your employer on the deadline for using that balance.
“Different employers have different dates for their FSA years, though many are on a calendar-year basis,” Micheletti said. “If you don’t use the money in your FSA account by the end of your FSA year, you lose that money — with some FSA-specific extensions. Plan now how to use any funds you have.”
Decide Whether You’ll Be Itemizing on Your 2023 Return
Single tax filers will be eligible for a standard deduction of $13,850; for joint filers, it will be $27,700.
Mortgage interest of more than $750,000 is not deductible, so many taxpayers find it makes sense to take the standard deduction instead of itemizing, Micheletti said.
“You can review last year’s tax return to get a base point,” he said. “Or check your tax return software or talk with your tax preparer.”
Make Charitable Donations
While Micheletti said this is a good thing to do any time of the year, you may be able to take deductions for contributions you make by Dec. 31.
“Donations can include household items, vehicles and stocks/investments as well as cash,” he said. “Anytime you make a donation, get a receipt.”
Maximize Retirement Plan Contributions
As Richard Lavina, CPA, CEO and co-founder of Taxfyle, explained, pre-tax contributions to retirement accounts, such as a 401(k) or traditional IRA, can significantly decrease your taxable income.
The contribution limit for a 401(k) in 2023 is $22,500, and the limit for an IRA is $6,500 — those 50 and older can contribute an extra $1,000.
Harvest Investment Losses
The strategy known as tax-loss harvesting involves selling stocks, bonds or mutual funds that have lost value to offset the taxes on gains from winning investments.
“You can deduct losses against any amount of gains,” Lavina said, “and, if your losses exceed your gains, you can use up to $3,000 to reduce your other taxable income.”
Pay Estimated State Income Taxes Early
If you expect to owe state income taxes, consider making your fourth-quarter payment in December instead of waiting until the January due date. By doing so, you can deduct the taxes on your 2023 federal return — if itemizing — and lower your federal tax bill, Lavina explained.
Stay Informed
Last but not least, make sure you stay on top of any tax law changes to ensure you’re taking advantage of all possible deductions and credits, said Lee Reams Sr., co-founder of TaxBuzz.
“As for how much should be done to prepare for the new tax season, the answer is as much as possible,” Reams said. “The more you prepare, the less stressful tax season will be. Start early, stay organized and seek professional help if needed. Remember, tax planning is a year-round activity, not just something to do at the end of the year.”
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