3 Things to Do Before Tax Season Sneaks Up on You

As the calendar year winds down, the approach of tax season can feel daunting for many individuals and businesses. The prospect of sorting through paperwork and organizing finances often brings anxiety. However, taking a proactive approach can transform this daunting task into a manageable one. Here are six crucial steps to take before tax season catches you unprepared.

1. Organize Your Financial Documents

Your first step should be to tidy up your financial documents. Gather all relevant paperwork, like W-2s, 1099s, bank statements, and any receipts related to deductible expenses. Create a dedicated folder—either digital or physical—to store these documents as you receive them throughout the year.

Organizing your financial documents will ease the preparation of your tax return. It can save you hours of searching and reduce stress as you approach the deadline. For example, if you track your medical expenses throughout the year, having all receipts in one space can remind you of deductions you might otherwise forget.

2. Review Last Year’s Tax Return

Taking time to look over last year's tax return can be incredibly beneficial. Check for deductions you missed or changes in your financial circumstances that might affect your current year's tax situation.

For example, if you realized that charitable contributions weren't fully documented last year, you can start recording those donations now. Research shows that many taxpayers miss eligible deductions simply because they forget about prior-year inputs. By reflecting on your past filings, you can prepare more effectively for the current season.

3. Stay Informed about Tax Law Changes

Tax laws are subject to frequent updates, which can lead to significant changes that impact your return. Take some time to research any new changes in tax codes that could affect potential deductions and credits available to you.

For instance, changes in standard deduction amounts or tax brackets can influence how much you'll pay. In 2022, the standard deduction rose to $12,950 for individuals and $25,900 for married couples filing jointly. Understanding these shifts enables you to maximize existing deductions and avoid mistakes on your return.

4. Create a Budget for Tax Preparation

Thinking about tax preparation expenses is just as important as gathering documents. Consider costs like hiring a tax professional or purchasing tax software. Allocate funds for these expenses in advance to avoid financial strain at the last minute.

For example, hiring a tax professional might cost you around $300 to $1,000, depending on the complexity of your return. By planning ahead, you can ensure that you have the financial resources available to support a smooth tax preparation process.

5. Set Aside Time for Tax Preparation

With busy lives, finding dedicated time for tax preparation can be challenging. Allocate specific blocks of time to this task, whether you plan to do it yourself or consult a tax professional.

This planned time will help you avoid the rush and reduce the chance of mistakes. For instance, instead of cramming everything into a weekend, consider setting aside just one hour each evening to review a section of your documents or fill out portions of your return.

6. Consider Tax-Advantaged Savings Options

As the new year approaches, explore tax-advantaged savings options that may lower your taxable income. Contributing to retirement accounts like a 401(k) or IRA before year-end can significantly benefit you.

Ready for Tax Season?

Taking these proactive steps before tax season arrives can streamline the preparation process and alleviate stress. From organizing documents to staying updated on changes in tax law, each step prepares you for a smoother experience.

Don't wait until the deadline approaches; start implementing these strategies now. By doing so, you can confidently welcome tax season, ready to tackle it head-on. If you would like us to guide you, please book a tax consultation and we'd be happy to help!