For many taxpayers, filing a tax return can feel like checking off a task that won’t come up again until the following year. However, what you do throughout the year can significantly impact your refund or the taxes you owe. Staying organized and proactive with tax planning can save you time, stress, and money. Here are key strategies to help you stay on top of your taxes all year long.
Organize Your Tax Records
Creating a system for organizing your tax records is the foundation of successful year-round tax planning. You can use a digital software program to store documents electronically or stick to physical folders, but the key is to keep everything in one place. Organize your records as you receive them, including income statements, receipts for deductions, charitable contributions, and any other tax-related documentation.
Why it matters: Organized tax records make it easier to prepare your tax return and help ensure that you don’t miss any potential deductions or credits. Plus, it’ll save you from the last-minute scramble when tax season rolls around.
Understand Your Filing Status
Your filing status affects much more than just your tax return. It influences your standard deduction, eligibility for credits, and the tax rate you’re subject to. Common filing statuses include:
• Single
• Married filing jointly
• Married filing separately
• Head of household
If your family situation changes - like getting married, divorced, or having a child - it’s important to evaluate how these events impact your filing status. Choosing the correct filing status can make a big difference in the amount of tax you pay. For example, filing jointly with a spouse can often reduce your tax liability, but in some cases, filing separately may offer more benefits.
Tip: The Winston CPA Group helps you figure out your correct filing status if you’re unsure.
Keep an Eye on Your Adjusted Gross Income (AGI)
Your AGI, or Adjusted Gross Income, is one of the most important numbers on your tax return. It’s your total income from all sources (wages, investments, freelance work, etc.) minus adjustments and deductions like retirement contributions, student loan interest, and certain health savings account contributions.
Why is AGI important? Your AGI determines your tax bracket and how much you’ll owe in taxes. Generally, the higher your AGI, the more tax you’ll pay. It also impacts your eligibility for tax credits, deductions, and even health insurance subsidies.
Where to find it: You can find your AGI on Line 11 of your Form 1040 tax return. To lower your AGI, consider tax planning strategies like contributing to retirement accounts or taking advantage of deductions for health savings accounts (HSAs) or education-related expenses.
Check Your Withholding Regularly
Federal income tax works on a “pay-as-you-go” basis, which means taxes should be paid throughout the year as you earn income. If enough tax is not withheld from your paychecks, you could end up owing more taxes when you file.
Life changes such as a new job, a side hustle, or even switching to self-employment can impact how much you owe. It’s a good idea to regularly review your withholding, especially after any significant life or financial changes.
How to check: Use the IRS Withholding Estimator to see if you’re withholding the right amount. If you need to make changes, submit a new W-4 form to your employer to adjust the amount of tax withheld from your paycheck. For self-employed individuals or freelancers, it’s important to check whether your estimated tax payments are accurate.
Update Personal Information Promptly
Have you moved or changed your name? It’s important to notify the IRS, the Social Security Administration, and your employer as soon as possible. Keeping your address and name up to date ensures that your tax documents are accurate, and you won’t run into issues when filing your return.
This is especially important if you move to another state where income tax rules may change. A timely update prevents complications down the line.
To officially change your address with the IRS, you’ll need to submit Form 8822, Change of Address. For name changes, report it to the Social Security Administration so your records match when filing.
Save for Retirement and Lower Your Tax Bill
Contributing to retirement accounts is not only a smart move for your future but can also lower your taxable income. By contributing to a 401(k) or traditional IRA, you can reduce your AGI and potentially lower your tax bill.
Many people feel like they don’t make enough to contribute to retirement. The key is to start with a manageable amount to get into the rhythm of consistently saving, and then gradually increase your contributions over time.
For small business owners and freelancers: Consider setting up a SEP IRA or Solo 401(k). These retirement accounts offer higher contribution limits, helping you reduce your taxable income while securing your financial future.
Q&A: Common Tax Planning Questions
Q: How often should I review my tax situation?
A: It’s a good idea to review your tax situation quarterly, especially if you’re self-employed or have a side business. Regular reviews help you avoid surprises and adjust your withholding or estimated tax payments as needed.
Q: Where can I find my AGI on my tax return?
A: Your AGI is listed on Line 11 of your Form 1040. It’s a key number for understanding how much tax you owe and whether you qualify for deductions or credits.
Q: What if I don’t know which filing status applies to me?
A: Filing status can be confusing, especially if multiple statuses apply to your situation. You can use the IRS Interactive Tax Assistant tool to determine which status is most beneficial for you.
Q: Why should I care about withholding if I usually get a refund?
A: Even if you typically get a refund, life or income changes can affect how much you owe. Reviewing your withholding helps prevent underpayment and ensures you’re on track to avoid penalties or a large tax bill at the end of the year.
Tax planning is not just a once-a-year activity.
Staying proactive throughout the year can make tax season easier and prevent costly mistakes. For personalized guidance and year-round tax planning support, visit Winston CPA Group’s tax page. We’re here to help you stay ahead and prepared.
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