7 Ways to Start Minimizing Next Year’s Taxes Now

Probably the last matter you want to think nearly when you’ve merely filed your taxes for 2021 is your 2022 taxes. Even if your prep for the past tax year went well, information technology’s nice to not worry nearly taxes for a while. But as the overused platitude goes, income tax preparation should be a marathon, non a dart. It’southward something you lot should be thinking near and planning for all year.

At present is the perfect time to start, while this past year’s taxation problems are however fresh in your mind. After all, your current financial activities affect your returns next spring. And you lot want them to have the right kind of impact, if possible.

If you haven’t filed your taxes yet, y’all’d better get on it. If you’re non able to brand the Apr 18, 2022, deadline, you can at least file for an extension. That said, the IRS expects you lot to pay at least a portion of what you’ll owe when you file for an extension.

Whether you’ve filed for the 2021 tax year or non, hither are seven means to continue income taxes in the back of your mind all twelvemonth, with practical tips that tin can aid make your tax experience next year a little more pleasant.

1. Learn How Life Events Affect Your Taxes

Major events in your life are probable to affect your 2022 taxes, sometimes in a large mode. For example, if you get married or divorced, have a babe or prefer a child, or if a spouse or dependent dies or moves away from your dwelling house, your filing status and tax do good eligibility tin can alter.

Similarly, starting a college career, ownership a abode, or joining the ranks of the unemployed will alter the way you complete your 2022 1040. If you know ahead of time what impact these events could accept, y’all might exist able to make adjustments in other areas of your financial profile. The IRS has a helpful page almost life events that y’all should consult for more specific guidance.

2. Cheque if You Should Alter Your Withholdings or Pay Estimated Taxes

If y’all’re a Westward-2 employee, consider the outcome of your 2021 taxes. Did you get a large refund? Or did you lot have to pay a significant amount? If either is the case, you should recollect about irresolute your withholding, especially if yous’ve experienced or will experience i or more of the life events listed above. The IRS Tax Withholding Estimator may be helpful here. You’ll have to fill out a new class W-iv to change your withholding status.

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If yous are or volition exist cocky-employed for the first time in 2022, y’all’ll demand to estimate how much you lot will owe in taxes every quarter based on your income and expenses for each menses and send that amount to the IRS and state tax agencies. It’s not easy, and the amount may be nothing more than an educated judge. If you don’t pay in advance and wait until taxes are due next spring, you’ll accept to pay an entire year’south worth of taxes at in one case, plus penalties and interest.

Two small business organization accounting websites in particular can help: GoDaddy Accounting and QuickBooks Self-Employed. Both allow yous to import and categorize your banking transactions. Based on that data, they guess what you might owe every quarter.

The IRS has information about paying estimated taxes. Having some insight on where you stand up with income taxes throughout the year helps with your ongoing tax planning.

Are you going to be cocky-employed for the first fourth dimension in 2022? You demand to start submitting quarterly estimated taxes to the IRS and state agencies.

three. Keep Accurate Records

Keeping accurate records is especially important if you’re self-employed. You need to maintain thorough, accessible records of all your business-related income and ensure you lot report all the money that comes in. You also must document every expense and effigy out the correct tax-related category for each i. If you lot do this on paper, save every receipt in folders organized by month or category and make a notation about its purpose.

Personal finance apps and small business concern accounting software can help tremendously with keeping fiscal records. With many apps, you tin can import all your banking transactions and the app or website helps y’all categorize them. These apps help with other bookkeeping tasks, such as budgeting and creating reports at tax time, also. Very small businesses might be able to get by with Mint.com (free) or Quicken. Larger or more complex businesses might consider Intuit QuickBooks Online or Zoho Books.

If you’re an employee who receives a W-2, y’all should yet have digital or concrete folders for storing documents such equally charitable contribution records and property tax statements. When you start to receive forms like your W-2 and 1099s next yr, y’all can add them to the mix.

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Screenshot of creating a budget in the Mint app

Free personal finance manager Mint allows y’all to set up budgets for revenue enhancement-related and personal categories.

4. Learn More than Virtually Tax Deductions and Credits

The IRS class 1040 and its supporting forms and schedules contain hundreds of deductions and credits that can save you a lot of coin in tax breaks. (Interpret them correctly, and yous might be able to have some awfully strange taxation deductions.) If y’all do your taxes without software, it’south piece of cake to miss some of these revenue enhancement breaks, even if you lot’re eligible. The trick is to be enlightened of them, so yous know when an expense might exist deductible as you get through the year.

Screenshot listing some tax deductions and credits

IRS form 1040 and its related forms and schedules contain hundreds of taxation deductions and credits.

The IRS has two web pages that list all the major deductions and some lesser-known ones, with links to detailed information: one is for individuals and the other is for businesses.

NerdWallet too has a guide to tax deductions and a list of popular credits and deductions for the 2022 taxation year. You can also rail your financial accounts here and become your credit score periodically for free.

Keep an eye on personal tax grooming websites and the twelvemonth-circular services they offer, besides. Some maintain blogs that encompass specific deductions and credits for 2022 and go on y’all up to date on taxation law changes throughout the twelvemonth. TurboTax and H&R Block offer extended services for individuals who use the sites’ tax preparation tools. Both assign you to a CPA or other tax professional who tin can answer your questions and troubleshoot your return via video chat. They’re bachelor twelvemonth-round to assistance with tax planning.

5. Save for Retirement During the Twelvemonth

If yous don’t already have an IRA or a 401(k), it’s time to consider investing in your future and making a dent in your taxation obligation at the same time. If yous do take one and aren’t contributing the maximum amounts, think most bumping up the total yous put in.

Self-employed individuals may not accept the employer-matching option that Due west-two employees exercise, but they can still put coin away for retirement and claim these contributions on their revenue enhancement returns. Your options include a Simplified Employee Pension (SEP) or a i-participant (solo) 401(yard) plan. Another pick is the Savings Incentive Lucifer Plan for Employees, besides known every bit the Simple IRA Plan. The IRS has more detailed information about all these retirement plans for the cocky-employed.

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6. Give Abroad Some Coin

You don’t have to wait until December 31 to think virtually philanthropy. Donating money to qualified charitable organizations throughout the year usually translates to a taxation deduction. In fact, when filing for the 2021 tax twelvemonth, non-itemizers are allowed to deduct up to $300 in charitable contributions ($600 for married filing jointly). As of this writing, we don’t know what Congress may do with this deduction for 2022, so continue an eye on tax-related news.

You won’t get a deduction for giving someone a souvenir of cash or holding worth up to $16,000 during the year, but neither will yous have to pay the IRS’ souvenir tax. This is a good way to reduce your taxable income while helping a family fellow member or friend.

Screenshot showing categories of donations for tax purposes

Donate money through qualified charitable organizations throughout the year, and you could chip abroad at your income tax obligation.

7. Review Your Tax-Related Income and Expenses

If you’re self-employed and have to pay quarterly taxes, yous have to review your taxation-related income and expenses anyway. Y’all should exist looking at them at least monthly. If you use a personal finance or small-scale concern accounting application, information technology shouldn’t be a trouble. You tin can even get a crude idea of the rest between incoming and outgoing money past using a paper organisation and a calculator or Excel.

Go on a copy of your 2020 and 2021 tax returns handy. Fifty-fifty though taxation police force changes for 2022 won’t be finalized until the end of the yr, you can see why you got the refund you did or had to pay in equally much as you did over the last couple of years. These returns are likewise useful for figuring out your total tax obligation over the past few years. Unless your financial state of affairs has changed drastically, yous can wait a similar tax obligation.

Continue Track of Your Taxes All Year

Tax planning should be a natural part of your overall financial planning—and it should go along for all 12 months of the year. If you treat it like that, you’ll find that preparation and filing season won’t be nigh as painful and panicked. When it does come time to file, revenue enhancement software can help you get a bigger refund and reduce your risk of an audit.

Source: https://sea.pcmag.com/old-tax-software/43761/7-ways-to-start-minimizing-your-2021-taxes-now