4 Tips to Prepare for Tax Filing Season

Now that the holiday season is over, and you’ve identified your New Year’s resolutions, it’s time to turn your attention to the most exciting subject on everyone’s mind – Yes, the tax season is officially here.

If you haven't already, now is the time to get prepared. Whether you meet with a tax professional or prepare your taxes yourself, proper planning can help the process go more smoothly and may reduce the risk of costly errors. While amending prior returns may be to your benefit, it’s far more beneficial to get it right from the start.

Check out the tips below and prepare to tackle this tax season with confidence.

Tip #1: Gather & Organize All of Your Tax Forms

Beginning in mid-January, you likely started to receive the tax forms you need to complete your return. Regardless of whether or not you’re expecting a refund, you’ll want to make a list of the important documents that affect your total taxes due.

Once you have received your documents, review each one carefully to make sure they are accurate - always contact the sender if there are any discrepancies. More often than not, you’ll have other documents to reference for accuracy. Your W-2, for example, can be compared to your last pay stub of the prior year. Your investment-related 1099s can be compared to your December or end-of-year brokerage statements, and so on. Remember, even a simple misspelling can cause a red flag with your tax return. I can’t express enough the importance of inspecting all your documents carefully.

Some of the forms you will need to look out for include:

W-2s for wages, salaries, and tips
1099-INT/DIV/OID/B for additional income, interest, gains, and losses
1099-S for the sale of real estate
1099-NEC for nonemployment compensation
1099-G for unemployment compensation
1095-A for government marketplace health coverage
1098s for reporting interest and tuition payments
W-2Gs for any gambling winnings
Schedule K-1s for company ownership
SSA-1099 for Social Security benefits

Tip #2: Organize Your Expense Receipts

BUSINESS OWNERS

If you have your own business or plan on itemizing your deductions, you will need to record expenses so that you can take advantage of all available write-offs and other deductions. Examples of write-offs/deductions include typical business expenses, medical expenses, and other expenses that can be listed on your Schedule A or Schedule C. The IRS provides guidance on supporting business documents that you can view HERE (link).

Receipts can be physical receipts or bank and credit card statements that show payments for these items. These receipts should be organized for easy reference and can be summarized using Excel, Quickbooks, or any other accounting software.

INDIVIDUAL/FAMILIES

While business owners often get the attention for tax deductions, individuals and families often have expenses that can be deducted as well. Examples of these deductions include:

Medical expenses
Childcare expenses
Unreimbursed work-related expenses
Self-employment expenses
Other expenses

Medical expenses generally require itemization to be deducted. The expenses can be related to you, your spouse, your dependents, and any children you could have claimed but didn’t because of divorce or separation. Examples of qualified expenses include:

Premiums for medical, vision, dental, long-term care, Medicare Part B and Part D (if not reimbursed for and not paid for using pre-tax dollars).
Co-pays for medical, dental, or vision.
Prescription medicine, hearing aids, eyeglasses and contact wear, and other medical aids – even the costs associated with guide dogs!
Nursing care and hospital stays, and smoking cessation programs.
The transportation and mileage for trips to and from appointments with any qualified medical professional.
Prepaid medical expenses, such as those associated with continuing care retirement communities.

Childcare expenses do not require itemization, as these expenses are commingled to determine any credits that may directly offset your tax liability. These expenses only qualify if they were required to enable you to look for work, or actively engage in work. The credit applies for children under the age of 13 as of Dec 31st of the tax year, and/or a disabled spouse or dependent who is physically or mentally unable to care for themselves. Examples of childcare expenses include:

Dependent care expenses
Daycare expenses
Day camps and after-school programs

Unreimbursed work-related expenses are no longer qualified for federal tax deductions; however, some states still allow for the deduction of these expenses. As of 2020, the states allowing tax deductions were limited to Alabama, Arkansas, California, Hawaii, Minnesota, New York, and Pennsylvania. Check with your respective state to see if the rules have changed since 2020.

Self-employment expenses may include the materials, supplies, marketing, travel, professional insurance, and the costs to maintain an office. If you work from home, you may also be able to deduct a portion of your utility bills, rent/mortgage, and other aspects of your home costs.

Other expenses are an oversimplified way of saying that, based on your personal tax situation, you may qualify for special deductions on a state or local level. Check with your tax professional to determine what additional expenses may be deductible.

Tip #3: Document All Charitable Contributions

Charitable contributions and donations are common among those with a philanthropic mindset. Donations made to a tax-exempt organization may provide you with a charitable contribution write-off. Unlike 2020 and 2021, charitable contributions can only be deducted if you choose to itemize (vs. standard deduction).

Examples of charitable contributions can come in the form of cash, investments (i.e. stocks, ETFs, etc.), or real property. Most organizations, from churches to fundraisers, can provide a record of your tax-deductible contributions if requested. In fact, they are required to provide a receipt if a single donation is $250 or more, and you are required to retain this documentation.

Tip #4: Obtain a Copy of Last Year’s Tax Return

There are several reasons you’ll need to reference your prior-year tax return, including 1) the IRS will ask for information from your prior-year return, 2) the identification of carryover losses, depreciation, capital losses, passive losses, etc., and 3) a basis of checks and balances for you or your tax preparer to use to identify potential gaps in filing information so you don't overlook something this year.

If you are using the same preparer as the previous year, they should have a copy of your tax return. If not, locate your most recent return and have it ready with your other tax items.

Don't let tax preparation leave you feeling overwhelmed. Enjoy less stress and a smoother process by preparing everything you need for filing this tax season.

Please contact Lucid Wealth Planning if you have any additional questions or anything else regarding financial planning services.

^1. https://www.charitynavigator.org/index.cfm?bay=content.view&cpid=9222

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