How to Prepare for Tax Season
While tax preparation may not be the most glamorous aspect of personal finance, it is undeniably crucial to ensure a smooth and stress-free financial journey. As we delve into tax season, understanding the intricacies of tax regulations, staying on top of changes, and implementing strategic financial planning will be key to optimizing your returns and minimizing headaches.
In this comprehensive guide, we will unravel the complexities of preparing for your 2023 taxes. From recent legislative changes to time-tested strategies for maximizing deductions, we'll equip you with the knowledge and tools necessary to navigate the financial landscape successfully. Whether you're a seasoned taxpayer or a first-timer, join us on this journey as we break down the essential steps to help you face the upcoming tax season with confidence and competence. Let's embark on a proactive approach to financial well-being and make 2024 a year of financial empowerment. Remember that this guide is for informational purposes only and is not a replacement for real-life advice, so consult your tax, legal, and accounting professionals before modifying your strategy.
The Tax Brackets
Here are the tax brackets and the corresponding income ranges:
These modest changes to the tax brackets also mean that wage earners may fall into lower brackets this tax year. Here is one example: A single filer at $95,000 in taxable income would have fallen into the 24 percent bracket for tax year 2022. The filer would now be in the 22 percent tax bracket for 2023. These new rates will likely expire in 2025 unless Congress acts to make them permanent. Exemptions also changed under the new tax code.
Remember that the tax brackets represent how much you will pay for each portion of your income. For example, if you make $125,000 for the 2023 tax year and are married filing jointly, you would pay 10 percent on the first $22,000, 12 percent on the next $67,450, and 22 percent on the final $35,550. You would not pay 22 percent for the entire $125,000 of your annual income.
IMPORTANT DEADLINES
APRIL 15, 2024
FIRST QUARTER 2024 ESTIMATED TAX PAYMENT DUE
2023 INDIVIDUAL TAX RETURNS DUE
Most taxpayers have until April 15 to file tax returns. Email or postmark your returns by midnight on this date.
LAST DAY TO MAKE A 2023 IRA CONTRIBUTION
If you have not already contributed fully to your retirement account for 2023, April 15 is your last chance to fund a traditional IRA or a Roth IRA.
INDIVIDUAL TAX RETURN EXTENSION FORM DUE
If you cannot file your taxes on time, file your request for an extension by April 15 to push your deadline back to October 15, 2024.
JUNE 17, 2024
SECOND QUARTER 2024 ESTIMATED TAX PAYMENT DUE
SEPTEMBER 16, 2024
THIRD QUARTER 2024 ESTIMATED TAX PAYMENT DUE
OCTOBER 15, 2024
EXTENDED INDIVIDUAL TAX RETURNS DUE
You have until October 15 to file your 2023 tax return if you received an extension.
*Tax deadlines on weekends or national holidays will be delayed until the following business day. Also, the IRS can adjust federal tax deadlines on short notice based on its assessment of financial or economic conditions.
**Extended due dates exist for residents of Maine and Massachusetts. Individuals who live in Maine and Massachusetts have until April 17, 2024, to file their 2023 Form 1040 because April 15, 2024 is Patriots' Day and April 16, 2024, is Emancipation Day.
The Child Tax Credit
The 2023 Child Tax Credit allows a credit of up to $2,000 per child for 2023.
The credit is partially refundable and phases out at income thresholds of $200,000 (or $400,000 for married taxpayers filing jointly).2
Preparing for the Tax Season
Planning well before the tax season may help you better prepare for the unexpected. Here are several reasons to begin early:
● Your home, job, or relationships changed
● You need to start saving money if you may owe taxes
● You want to ensure you qualify for tax deductions
You can make changes throughout the year to ensure your tax preparations go smoothly. In particular, you can periodically assess your paycheck withholdings to get a refund or reduce or eliminate your tax burden.
You should track and store your tax and other financial records to avoid delays or frantic preparations as the filing deadline approaches. Records may include W-2 forms, canceled checks, certain receipts, and previous returns.
Here is a list of other items to start gathering:
● Pay stubs
● Mortgage payment records
● Closing paperwork on home purchases
● Receipts for items or services you may want to claim as itemized deductions
● Records on charitable giving and donations
● Mileage logs on cars used for business
● Business travel receipts
● Credit card and bank statements to verify deductions
● Medical bills
● 1099-G forms for state and local taxes
● 1099 forms for dividends or other income
During the first few months of 2024, ensure you receive your W-2 and 1099 forms and other tax documents. Leave adequate time to collect documents and prepare to file your taxes before the April 15, 2024 deadline.
Tightening the Nuts and Bolts
Here are some additional ways to prepare this year for next year’s tax season:
Look at last year: Look at last year’s return. In the months ahead, you may still have the opportunity to contribute more to your retirement plan, which may lower your taxable income.
Donate to charity: How about “bunching” your charitable donations? Bunching allows you to optimize your deduction allowances by making two or more years’ worth of charity donations in one year.
Let us say you are married, expect to itemize your deductions, and anticipate making $15,000 in annual donations. By donating $30,000 in one year and skipping the next, you may be able to qualify for a higher deduction.3
Review Capital Losses: Consider deducting capital losses if investing in the financial markets. You can claim deductions if you experience losses, but you can claim losses only if they exceed capital gains. You can claim the difference of up to $3,000 per year if you are married filing jointly or $1,500 if you are filing separate returns. Net losses that exceed $3,000 can carry over into future years.4
Deductions for capital losses can only apply to investment property sales, not the sale of investment property held for personal use.
Get organized: Find a place to store your tax documents until it is time to prepare to file. A sound recordkeeping system may alleviate concerns later as the deadline gets closer.
If you store your documents or prior returns on your computer, back them up on a thumb drive or other device or system in case your computer is hacked or stolen.
Consider other taxes: Monitor local and state government requirements that may affect your tax situation.
How Long?
The IRS provides recommended timelines for retaining financial documents:
1. You should keep your tax records for three years if #4 and #5 below do not apply.
2. You should keep records for three years from the original filing date of your return or two years from the date you paid your taxes if you claimed a credit or refund after you filed your return. Select whichever is the later date.
3. You should keep your records for seven years if you claim a loss from worthless securities or a bad debt deduction.
4. You should keep your records for six years if you failed to report income that you should have and the payment was more than 25 percent of the gross income listed on your return.
5. Keep records indefinitely if you do not file a return.
6. You should keep employment tax records for at least four years after the due date or after you paid the taxes. Select whichever is later.
This Special Report is not intended as a guide for the preparation of tax returns. The information contained herein is general in nature and is not intended to be, and should not be construed as, legal, accounting or tax advice or opinion. No information herein was intended or written to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Readers are cautioned that this material may not be applicable to, or suitable for, their specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision. This material was prepared by FMG, and the information given has been derived from sources believed to be accurate. This is not intended as a guide for the preparation of tax returns, nor should it be construed as legal, accounting or tax advice. This information is subject to legislative changes and is offered “as is”, without warranty of any kind. Publisher and provider assume no obligation to inform readers of any changes in tax laws or other factors that could affect the information contained herein.
Citations.
IRS.gov, 2023