Navigating Tax Season: Simple Strategies

Taxes

Mar 28

Tax season is upon us, and for many it can feel a bit like navigating a maze, closing your eyes, and hoping for the best. As a financial advisor, I don’t just focus on investments and goal planning. I think that to truly have a useful plan it has to address all facets of financial decision making which includes navigating the tax landscape to try and save money wherever possible (legally of course). So, since we are all in the midst of taxes, let’s take a look at some strategies and considerations together.

1. Get Organized Early: Your First Step to Sanity

The biggest stressor during tax season? Disorganization. Start by gathering all your important documents:

a. W-2s and 1099s - These are your income statements from different sources.

b. Receipts - For deductions like charitable donations, medical expenses, or business expenses.

c. Investment statements - From your brokerage or retirement accounts.

d. Mortgage interest statements - If you own a home.

e. Records of your property taxes (home, car, and other owned property that is taxed annually)

Tip: Create a folder (physical or digital) to keep everything in one place. Trust me, your future self will thank you!

2. Maximize Your Deductions: Every Dollar Counts

Deductions reduce your gross income, meaning you pay less in taxes. Here are a few common ones:

a. Standard Deduction vs. Itemized Deductions: Most people take the standard deduction, but if you have significant medical expenses, charitable contributions, or mortgage interest, and/or tax payments itemizing might be something to explore.

b. Charitable Donations: Did you donate any items to local charities? Keep the receipts! Track mileage used for charitable activities. Of course monitor cash and other securities given as well. It all adds up but won’t help your taxes typically unless you itemize

c. Education Expenses: If you or your children are in college, look into deductions for tuition and student loan interest.

d. Home Office Deduction: If you’re self-employed or work from home, you might qualify for this.

e. Track every dollar you spend on your business if you are self employed or a 1099. Most business expenses can be taken out of income and save you money, but the IRS wants to see the receipts if you are audited.

Tip: Use the IRS website or a reputable tax software to see which deductions apply to your situation. The more complicated your return, it may be worth exploring a relationship with a CPA or other trusted tax preparer.

3. Retirement Contributions: A Win Now and A Win Later

Contributing to your retirement accounts not only helps invest in your future financial freedom, but can also lower your current tax bill.

Traditional IRA or 401(k): Contributions are often tax-deductible. Advised if deduction is available and your tax rate now is expected to be higher than it will be later.

Roth IRA of 401(k): Contributions aren’t tax-deductible, but growth and eventual withdrawals in retirement come out tax-free when you reach certain milestones. Advised if your tax rate now is expected to be lower than it will be later.

4. Consider HSA or FSA Contributions

If you have a Health Savings Account (HSA) or Flexible Spending Account (FSA), contributing pre-tax dollars can reduce your taxable income and help cover medical expenses.

HSAs – Available to those covered under a high deductible health plan (HDHP). They offer an appealing triple tax benefit (tax deduction on deposit, tax deferred growth, and tax free withdrawals). You do have to spend the money on qualified health expenses. Unlike an FSA, the money is forever yours and you can invest it for faster growth until you need it.

FSAs – Available for health insurance plans that aren’t eligible for HSAs. Often funded by paycheck deferral. Gives you a tax deduction for money you put in. Withdrawals have to be for qualifying health expenses. Usually a use it or lose it plan. Check your provider’s rules on this.

5. Stay Ahead of Deadlines: Avoid Penalties

Missing deadlines can lead to penalties and unnecessary stress. Here are the key dates:

March 15th (Generally) – S Corporation returns are due

April 15th (Generally) - Deadline to file most other federal tax returns or request an extension.

State Tax Deadlines: Check your state's tax agency for specific deadlines. Usually ranges from 4/15 to 5/1

Estimated Tax Payments: If you’re self-employed or have income not subject to withholding, you might need to make quarterly estimated tax payments.

6. Don’t Hesitate to Ask for Help

Tax laws can be complex, and it’s okay to feel overwhelmed. On the surface they may seem simple (income-deductions=taxable income and then you calculate your tax and reduce it by your credits). However, making sure you find all the available deductions and credits takes time, recordkeeping, and expertise. I personally don’t believe in paying the government more than I owe them and I would be willing to bet you feel the same way.

So, if you are feeling overwhelmed consider the following:

a. Consult a Tax Professional: If you have a complex tax situation, consider working with a CPA or tax advisor to compile a thorough return. It’s an investment but you save time and probably taxes as well.

b. Financial Advisor: By the time tax season is here, there is only a handful of things you can do to sway your taxes in a better direction. The best tax returns are done for those that make tax planning a year round exercise and have a tax professional and financial advisor collaborating to help them reach goals faster. If you are considering a financial advisor for the first time, or looking to make a change, reach out and let’s see if we are a good fit.

c. Utilize Free Resources: The IRS website offers many helpful resources and publications.

A little preparation goes a long way when it comes to taxes. By planning ahead, keeping good records, and taking advantage of available deductions & credits, you can reduce your tax bill and keep more of your hard-earned money.

Need personalized tax planning strategy?

As a community centered financial advisor, I’m committed to helping clients navigate all aspects of their financial life. Tax season is just one piece of the puzzle. Other areas may include goal planning, saving/withdrawing, investment management, estate planning, insurance strategy, education planning, debt management, creative generosity, and more. Use the links below to connect:

My Website

Book a Free Consultation

Useful Links:

IRS Forms - https://www.irs.gov/forms-instructions

Credits & Deductions - https://www.irs.gov/credits-and-deductions-for-individuals

Tax Credits - https://www.irs.gov/newsroom/tax-credits-for-individuals-what-they-mean-and-how-they-can-help-refunds