Although tax season is still many months away, it’s never too soon to start preparing for tax time. Making smart money moves now will help you minimize the amount you owe in taxes next year.
We got tips from financial experts to help you make filing your 2024 tax returns a breeze. Here's what accountants wish you'd do ahead of time to make filing even easier.
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Maximize your tax-advantaged accounts
"One of the most potent ways to lower your taxable income is maximizing how much money you contribute to tax-advantaged accounts,” says Adam Garcia, financial advisor and founder of The Stock Dork.
These types of accounts include 401(k)s, HSAs, and IRAs.
Garcia says, “Contributions to these accounts are normally tax-deductible or grow tax-free, offering immediate or future tax benefits."
"This means that by contributing the maximum allowed into these accounts, you're not only putting away some money toward retirement or medical expenses, you're also reducing your taxable income in this tax year."
"Contributions toward traditional IRAs and 401(k)s directly lower the amount of income that is taxable, which could easily push one into a lesser tax bracket.”
Track your business expenses
“If you own a business, take advantage of deductions like business meals, travel, and expenses,” says Marty Burbank, owner of OC Elder Law.
Burbank continues, “Track your expenses diligently and keep good records. Business deductions can save thousands on your tax bill.”
Track all sources of income
“Keep good records of all income sources and expenses,” says John F Pace, CPA.
“Report everything accurately to avoid penalties, audits or charges of evasion,” Pace explains. “Forgetting to report even small amounts of side income is a common mistake I've seen cost clients dearly. Staying organized and compliant year-round saves headaches come tax time.”
Some surprising sources of income might be the interest earned through a certificate of deposit or a bank bonus you received when signing up for a new checking account. All of those funds must be reported.
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Donate to charity
"Charitable contributions serve not only worthy causes but also can reduce your taxable income when itemizing deductions,” says Garcia.
“Strategy matters, so plan your donations properly: Contribute appreciated assets like stocks or use donor-advised funds to maximize tax benefits,” he says.
“When you donate appreciated assets held longer than a year, you avoid capital gains taxes while getting a charitable deduction for the entire fair market value. Donor-advised funds permit an investor to be able to make a lump-sum charitable contribution and take an immediate tax deduction but distribute donations over time.”
Seek out tax credits
“Be sure to take advantage of every tax credit available, as these are a dollar-for-dollar reduction in your tax liability,” says Garcia.
“These credits are designed to provide for specific circumstances of the taxpayer, such as levels of earned income, education expenses, or dependent-care costs,” he explains. “Maximizing these credits can slash your tax bill by hundreds or bump up your refund. Ensure you qualify and keep proper records for claiming them accurately.”
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Evaluate the structure of your business
If you are self-employed, “consider an S-Corp or LLC structure for your business,” says Pace.
“These provide more flexibility in deducting business expenses and paying yourself a reasonable salary to minimize self-employment tax. I've helped many clients restructure and save thousands.”
Evaluate your withholding
As you receive your paycheck throughout the year, the IRS may withhold some of those funds at your direction. The amount withheld is directly tied to your tax-filing situation.
If you received a large refund last year or owed a lot in taxes, updating your withholding could help you avoid a surprise at tax time.
Another reason to update your withholding is if you’ve experienced some significant changes to your household during the tax year, which could impact your tax liabilities.
The IRS offers a free tax withholding estimator tool to help you determine the appropriate level of withholding for your situation.
Take stock of your capital losses
“Typically, the IRS only allows you to deduct $3,000 of capital losses each year,” says Josh Radman, founder of Presidio Advisors and a financial advisor with a background in equity compensation.
“However, Congress wants to encourage investment in small businesses. So Congress enacted Section 1244, which allows investors to claim $50,000 in losses (or $100,000 if married filing jointly) each year on their tax return if they invested in a company that was worth less than $1 million at the time of investment.
“So, instead of only being able to deduct $3,000 in losses,” Radman explains, “you could possibly deduct $53,000 or $103,000 in losses.”
Call your tax professional now
While it’s tempting to wait until February or March to reach out to your tax professional, working with them now is a good idea.
If you touch base in the summer or fall, your tax professional can offer straightforward tax planning advice about your unique situation.
Bottom line
When it comes to taxes, a little bit of planning can go a long way. Preparing now can help you eliminate some money stress come tax time.
More from FinanceBuzz:
- 7 things to do if you’re barely scraping by financially.
- Do you owe the IRS >$10K? Ask this company to help you eliminate your late tax debt.
- 12 legit ways to earn extra cash.
- Learn how you can escape the paycheck-to-paycheck grind.
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