That time of year is right around the corner.
I’m not talking about the holidays. I’m talking about tax season.
While taxes might be the furthest thing from your mind right now, there is a lot you can do before the end of January filing date to make the 2022 tax filing season easier.
It starts with preparation. Whether you plan to use a professional tax preparer or software or handle the return on your own, you will need to assemble information and gather receipts and tax documents. The sooner you start, the better – especially if you have complicated investments or are a business owner. It’ll help you come January when you get hit with a blizzard of tax forms (Form W-2, Forms 1099 including 1099-MISC, 1099-INT, 1099-K).
It’s also not too late to reduce your taxable income for the year, and it could significantly trim your tax bill. So we asked some of our favorite financial experts for their best tips to make tax season a breeze. Here’s what they had to say.
Work with a tax pro (and hire one now)
Deciding your filing method early on can make taxes a little easier to navigate. For some, online tax software offers a quick, easy, and affordable way to get the job done with little complication. Others may benefit more from the experience and knowledge that a professional tax preparer can offer.
Financial experts Daniella Flores, Jose Hernandez, and Kenneth Chavis recommend working with a professional tax pro when the situation calls for it. Maybe you’re a business owner or self-employed, or you traded crypto or have rental income. The trickier your tax situation is, the more it makes sense to get help from a tax pro.
“If you’re a business owner, work with a knowledgeable CPA who can help you with proactive tax planning to ensure you are not only compliant but also planning ahead to save you six figures and potential seven figures in future taxes,” Chavis says.
A tax expert can give advice, review your documents, and file your tax return, which can take “a huge weight off your shoulders,” says Flores, creator of money, career, and side hustle resource platform I Like to Dabble. The cost can range from $100 to $1,000 or more, but a tax expert can help you save on your tax bill by maximizing key deductions and credits you might have missed out on otherwise.but it will largely depend on your individual tax situation. Organize documents ahead of time to potentially save some time and money when you pass them off to your tax preparer.
“A good tax advisor is well worth their fee and can save you tons of headaches and money over time,” says Hernandez, founder of Financial University.
If you’re planning to work with a qualified CPA or tax accountant, it may be wise to secure one near you sooner rather than later. Many tax preparers aren’t taking as many clients this year, and it may cost more than it has in the past because it’s harder to find someone, says Michele Cagan, CPA, founder of Single Mom CPA and author of “Debt 101.”
“A lot of my colleagues are not really looking for new business, and a lot of people are paring down their client list,” Cagan says. “I’m severely limiting my tax clients this year.”
You can find licensed pros in your area through databases like the IRS Directory of Federal Tax Return Preparers, as well as IRS-partnered professional organizations like the National Association of Enrolled Agents or the American Institute of CPAs. If you’re using tax software and want more support from a tax expert, pricing typically depends on how much assistance you’ll need.
Don’t overlook key business expenses
Millions of Americans started businesses this year. If you’re one of them, you can leverage your business or side hustle to reduce your tax liability — and you should take advantage of it as much as possible, according to three entrepreneurs and experts.
“You can deduct a lot of money from your income for tax purposes that you normally would not have if you were a W-2 employee,” says Shang Saavedra, financial expert and creator of Save My Cents.
Many business expenses can be deducted dollar for dollar as long as they’re “ordinary and necessary” in your trade or business. For example, you can deduct business-related travel expenses if you own real estate investments under an LLC, says Rebecka Zavaleta, an entrepreneur who owns properties in multiple states while living abroad. When you deduct your business expenses, it lowers your taxable income and could push you into a lower tax bracket as a result.
Small business owners are often conservative with their deductions because they think they’ll get audited, says Vanessa Menchaca-Wachtmeister, a travel tech pro and creator of Wander Onwards. She says you should let the fear of getting audited stop you from maximizing your deductions and recommends being more aggressive with them, as long as you need it to run your business or side hustle. If you became a new business owner this year, you can deduct up to $5,000 in start-up expenses and another $5,000 in organizational expenses. Any remaining expenses must be amortized, or gradually spread out, over 15 years.
“The IRS understands that businesses need technology, travel, and investments,” Menchaca-Wachtmeister says. “As a small business owner, we are often very afraid of deductions while Amazon rarely pays any tax at all.”
Maximize tax-advantaged investing accounts
Think about increasing your contributions to tax-advantage investing accounts to reduce your taxable income.
There are several types of accounts you can leverage: Roth IRA, traditional IRA, 401k, 403b, Thrift Savings Plan, or health savings account (HSA). You won’t be eligible for all of those, but you may be eligible for one or two, which could “save you hundreds of thousands in taxes down the road,” says Jeremy Schneider, financial expert and founder of Personal Finance Club.
It’s likely too late to change your payroll contributions for a 401k, but you can still make IRA contributions. The 401(k) contribution deadline is usually the end of the calendar year, and the maximum you can contribute is $20,500 or $27,000 if you’re age 50 or older.
If you didn’t max your 401(k) this year, consider making a plan to do it in 2023. It not only multiplies the money you get from your paycheck but decreases your taxes in the long run, according to Maribel Francisco, an immigrant money coach and creator of Our Wealth Matters.
“You hit two birds with one stone,” Francisco says.
You have until April 18 to contribute to an IRA or Roth IRA, but you’ll need to indicate whether they’re for 2022 or 2023. The 2022 limits apply – which is $6,000 or $7,000 if you’re 50 or older – even when you contribute in 2023. The 2023 limits are a bit higher, and you can contribute up to Tax Day in 2024.
If you’re expecting a tax refund next year, financial educator Rita-Soledad Fernández Paulino recommends putting it in a Roth IRA. It won’t minimize your taxable income in 2022, but it will when you do your 2023 taxes.
“Figure out how to max out your Roth IRA every year,” says Fernández Paulino, creator of Wealth Para Todos. “If you could spend all of your twenties maxing out your Roth IRA, you can have over a million dollars of tax-free money at 65 years old without investing another dime in your thirties or beyond (assuming an average rate of return of 7%).”
Don’t sleep on HSAs either, which offer triple tax benefits and roll over to the next year. CFP Kenneth Chavis says his biggest money mistake was not contributing to and investing in an HSA sooner. Because there’s a high deductible health plan (HDHP) requirement, it doesn’t make sense for everyone.
“In the three years I could have contributed to one but did not, the total contributions I could have made was about $9,000,” Chavis says. “Assuming the $9,000 were to grow at a 7% annualized rate for 40 years, this would have grown to over $134,000 — a $125,000 net difference, all completely tax-free.”
Contact Kleshinski, Morris & Morrison CPAs
Tax season is right around the corner. If you need any kind of accounting or tax help, contact the experts at Kleshinski, Morrison & Morris CPAs. Call our office at 419-756-3211, reach us by sending email to email@example.com, or just fill out the contact form on our website at this link.