Most people confide in their tax preparer that they find the process of filing their returns to be frustrating and stressful. Once individuals start receiving their W-2s and 1099 forms in January, they are typically in a mad dash to gather all their supporting documents, review investment reports and financial statements and check to see if they still qualify for certain deductions and credits. However, a great deal of this anxiety can be eliminated if filers develop and adhere to a tax planning strategy on a year-round basis.
A recent Reuters article noted that the current tax climate - which has been rife with new rules, regulations and changes - has caught many individuals off-guard during tax season. A small number have been able to maintain their calm by monitoring these changes and planning accordingly for filing season. For example, some are maxing out their tax deductions early on to lower their liability in the event that certain rules change. This includes contributing the maximum to favorable and tax-advantaged accounts, such as health savings accounts, retirement funds, charitable contributions and even purchasing more energy-efficient items for which tax breaks are available. Not only does this ensure they are getting the most out of their deductions, but contributions to HSAs and retirement can help strengthen individuals' financial futures.
Accounting for expenses is everything
Gathering paperwork is considered one of the top sources of anxiety for filers, so starting a record-keeping system to track expenses that can be deducted can also make April easier. Rather than throwing old invoices and receipts into a box, cataloging them by the specific deduction for which they apply can help keep this information organized and lower the risk of individuals making preventable mistakes or errors.
Staying on top of which changes are being made to the tax code is also important for a year-round tax plan to work. Individuals may find that due to government changes, life events or falling into a new income bracket, they are no longer eligible for certain tax breaks or that they now qualify for ones for which they were previously not eligible. For instance, individuals who generally claim a medical expense deduction will now have to meet a new adjusted gross income threshold. Previous rules which allowed individuals whose medical expenses exceeded 7.5 percent of their AGI to claim the deduction will now have to meet the new 10 percent AGI threshold. Understanding these changes, among others, can lead to more efficiency and tax planning over the course of a year.
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