5 Tax Tips For the Last Minute and Year-Round

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Tax

Wealth Wednesdays

5 Tax Tips: For the Last Minute and Year-Round

Are you like many Americans who wait until the last minute to file your taxes? Or maybe you're planning ahead for next year. Here are some tips.

Published by Motley Fool Wealth Management Originally posted on Tue, Apr 12, 2022 Last updated on May 12, 2022

read time 5 min read

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Tax Day is April 18, 2022. While you technically get an extra few days to file, the deadline will be here before you know it. So if you're like many Americans who waited until the last minute, here are some tips to proceed with speed. And if you’re ahead of the game, use these tidbits to guide your preparations for next year.

Top priorities for last-minute tax filings

Tip #1: Time efficiency.

While everyone wants to minimize how much they pay in taxes or get back the highest refund possible, be smart about how much time you spend looking for possible deductions. For example, should you hunt downs all of your explanation of benefits (EOB) statements or call every doctor, lab, dentist, and pharmacy you may have visited last year to tally all of your out-of-pocket medical expenses? Unless you had a major medical expense, probably not. Why? Because most medical expenses do not exceed the standard deduction AND 7.5% of your adjusted gross income (AGI). Therefore, many people end up taking the standard deduction, which is as follows:

2021 Standard Tax Deduction

Single taxpayers $12,550
Married couples filing jointly $25,100
Married filing separately $12,550
Head of households $18,800

Source: IRS.gov

But if you think your itemizing will exceed the standard deduction, exhaust every possible deduction. Check out IRS.gov for some common ones.

Tip #2: Don’t forget your charitable contribution.

As we mentioned, many individuals will take the standard deduction. But even if you do, the IRS allows individuals to take an additional $300 credit for 2021 charitable contributions. And if you itemize your deductions on your taxes, don’t forget to take all your eligible charitable deductions.

Tip #3: Let’s talk about last-minute IRA contributions.

There are very few opportunities to go back in time to get a tax credit. But contributing to your IRA before April 18, 2022, can do just that.

Retirement savings vehicles—like 401(k) or 403(b) plans and IRAs—can be the most accessible way for many individuals to maximize their tax deductions. And while only IRAs allow you to contribute after the end of the year and still get a tax benefit for the prior year, most retirement savings vehicles are tax beneficial in some way.

The IRS has set limitations on annual plan contributions, so if possible, try to max out your contributions each year. For example, the total contributions you can make each year to all of your IRAs—traditional plus Roth—cannot exceed $6,000 ($7,000 if you're age 50 or older).

And if your plan has an employer match, even better. It’s free money for saving toward retirement.  

How do retirement savings impact taxes? The amount you contribute to a traditional IRA, 401(k), 403(b), or other employer-sponsored plan reduces your taxable income. In other words, you contribute pre-tax dollars to these accounts. Therefore your taxable income is lower than it would be otherwise. In addition, the earnings from these accounts are tax-deferred, meaning you only pay taxes when you withdraw your money. A Roth IRA differs from these in that you contribute after-tax dollars, but the earnings grow tax-free, so withdrawals are not taxed.

Tip #4: Don’t forget about the stimulus money you received.

In 2021, the government sent out the last pandemic-related stimulus check. You probably were not taxed on any money you may have received. Your tax return will reconcile that income and taxes you may owe. Register on IRS.gov to make sure you are capturing the exact amount that the IRS has recorded. Luckily, if you received too much stimulus, you don’t have to pay it back!

What about the child tax credits? You typically take these on your tax filing. But last year, most people received them in advance. However, unlike stimulus payments, if you received too many child tax credits, you will have to repay those.

Tip #5: Assemble your finance support team.

Preparing your taxes, especially last minute, may be overwhelming. This is especially true if your income varies significantly from year to year. For example, if you have a low-income-earning year, what strategies should you consider? What about if your income is unusually high? Planning ahead can help you maximize your tax deductions or lower your taxable income each year. In addition, there are some potential strategies that you should think about every year, regardless of income level.

image-3_wealth_strategies

You also may have questions about your taxes in general, such as, are you capturing all possible deductions? Or, what if you make a mistake?

Suppose you have these or similar questions. In that case, you may want to consider working with a finance support team, including a wealth advisor, tax professional, and perhaps even an attorney for legacy planning. You should always consult with qualified tax professionals for all tax questions or advice. The goal is to create a blueprint for your money (and therefore your taxes) year-round—to think ahead and not get caught unaware. Because when it comes to taxes, there are many contribution limits and withdrawal requirements based on the calendar year. Unfortunately, you generally cannot make up for lost time if you miss one.

Interested in learning more about tax strategies? Download our free report. And catch our Director of Financial Planning, Megan Brinsfield's latest appearance on Good Morning Washington as she discusses last-minute tax tips.

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