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The IRS processes huge amounts of data and documents each year. In 2021 alone, it processed more than 261 million tax returns and documents to supplement tax returns. That includes more than 83.9 million individual electronic tax returns.
One of the best ways you can make sure your tax return makes it through IRS processes unscathed is by preparing for tax season. When you have the information you need and are ready to file your return as early as possible, you increase your chances of getting a fast refund.
It’s important to prepare for tax season whether you’re planning to work with a tax pro or file your taxes on your own. Find out more about preparing for tax season below. We’ve got 10 steps you may want to consider following.
In This Piece
- Know When You Can Start Paying Taxes
- Gather Important Documents
- Gather Information About Dependents
- Double-Check Personal Info With Your Employer
- Plan Ahead to Pay Taxes
- Plan Ahead to Practice Good Financial Habits with Potential Tax Refunds
- Renew Your ITIN
- Start Preparing Your Return
- Research Professional Tax Preparers
- Consider Planning for the Future
1. Know When You Can Start Paying Taxes
If you owe taxes, you definitely need to know when to pay them. The IRS notes that you’re supposed to pay around 90% of your taxes throughout the year via withholdings on your paycheck or estimated quarterly tax payments. As far as returns go, the IRS started accepting 2022 tax returns on January 23, 2023.
2. Gather Important Documents
Taxes require a great deal of paperwork. Get organized by gathering those documents as soon as possible.
You can create a folder or basket where you store documents until you’re ready to use them. Because many tax documents, including W-2s and 1099s, might come electronically, create a digital folder where you can store those documents or be prepared to print physical copies for your basket.
Common documents you might need to file your taxes include but aren’t limited to:
- W-2s from employers
- 1099s from anyone who paid you miscellaneous, contract, or other relevant funds
- Documents showing medical, educational, childcare, or other expenses, especially if you’re itemizing
- Statements regarding investments or mortgage interest payments
- Receipts
You don’t have to keep every receipt throughout the year. You’ll need receipts to document deductible expenses, though, including charitable deductions. If the IRS ever audits you, they won’t just take your word for it.
3. Gather Information About Dependents
You’ll need the names and Social Security numbers of any dependents you include on your tax return. If someone else can or might claim one of your dependents on their return, you need to know that. For example, if you’re divorced, it might be a good idea to work out which parent will claim a child or children for the 2022 tax year. You can’t both claim the same child for the same tax year.
4. Double-Check Personal Info With Your Employer
Filing your tax return as soon as possible after the IRS starts processing returns can be a way to get a refund sooner—and avoid potential taxpayer identity theft. But you’re often at the mercy of employers and other institutions. Employers must send W-2s by the last day of January each year.
Whether your employer sends your W-2 early or waits until the last day, you could receive it late if your employer doesn’t have the right address. To avoid this issue, check with HR to make sure all your information is up to date.
This is actually a good exercise to practice with other businesses in December as well. Whether it’s a bank, your IRA provider or your child’s school, if someone is likely to send you tax documents, make sure they have your correct address.
5. Plan Ahead to Pay Taxes
If you fall behind on tax payments, you could pay high penalties and interest. You might also put yourself at risk for IRS collection methods, which can include tax liens and levies.
One of the best ways to keep yourself from becoming delinquent is to plan ahead if you think you might owe taxes. Here are a few tips for doing so:
- Start a savings account to pay for your taxes. If you put money away starting as early as December, you can break a tax debt into smaller chunks and have enough to cover it by the April deadline.
- Consider maximizing contributions and charitable donations to reduce your taxable income. This might lower the total amount you owe.
- Consider consulting with a professional tax attorney or accountant to find out if you can reduce your tax burden in other ways.
For most people, the deadline to pay federal personal income taxes for the 2022 tax year is April 18, 2023. However, the IRS did create an extension for those in disaster areas in California, Alabama, and Georgia. Individuals in these qualifying areas have until October 16, 2023, to pay taxes.
6. Plan Ahead to Practice Good Financial Habits with Potential Tax Refunds
It’s a good idea to be prepared to practice good financial habits with any resources you get from your tax refund. Take some time to consider your budget, debt, and financial goals. Make a plan to use your tax refund to pay down debt, establish stronger savings, make an important purchase, or start investing. That way, you don’t spend it all quickly and without much to show for it at the end of April.
7. Renew Your ITIN
If you use an Individual Taxpayer Identification Number to file your taxes and haven’t used it at least once in the past 3 years, it expires at the end of December the following year. That means if you didn’t use the ITIN on your 2019, 2020, or 2021 return, it will expire before you use it on the 2022 return.
If your ITIN has middle digits of 88, 90, 91, 92, 94, 95, 96, 97, 98, or 99 and you haven’t taken action to renew it, it’s also expired. You’ll need to renew your ITIN, but you can send the renewal form in at the same time you send your tax return in most cases.
8. Start Preparing Your Return
Want to get a serious head start and reduce the potential headache and stress of tax season? You can begin preparing your return today. If you use tax preparation software, you can enter as much information as you have right now. As you get information, you can quickly add it to your return within the software. By the time you receive your last W-2, you’ll have your taxes done.
While you’re getting ahead of the game, make sure you’re ready to receive a direct deposit of your refund when the time comes. You’ll need a valid bank account to do so. If you already received any of the government stimulus payments in your bank account, the IRS has your bank account information set up.
9. Research Professional Tax Preparers
Don’t feel like you can handle the job on your own? That’s fine, too. Consider using this extra time to research potential professionals or tax services that can help you file your taxes. If you choose a tax professional, make sure they have a valid Preparer Tax Identification Number, which indicates they’re authorized to file federal tax returns on behalf of others.
10. Consider Planning for the Future
While you finalize your return for tax season 2022, consider planning for tax season 2023 and beyond. Some ways you might plan include:
- Changing your withholdings. If you got back way more than you thought or owed more than you would have liked, your W-4 withholdings might be wrong. Visit your employer’s HR office to change your withholdings.
- Consider tax-loss harvesting. If you have any investments that are losing money and likely to continue to do so, cut them loose at a loss. You can use that loss to offset up to $3,000 of your income for next year’s taxes.
- Think about asset location. How and where you hold different investments impacts how they’re treated when it comes to taxes. Consider working with a financial advisor to minimize tax burdens on your investments with tax-aware asset location.
- Tax-favorable investments for the future. If you have extra money to put away for retirement, consider maxing out your contributions to 401(k)s or IRAs. These contributions are pretax, which means they reduce your taxable income for the year.
The post 10 Steps to Prepare for Tax Season This Year appeared first on Credit.com.
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