Tax season can be incredibly stressful if you haven’t prepared for it in advance. With all of the numbers, expenses to keep track of, and several different forms, it can become a hefty task come April. If you talk to financial professionals, including certified public accountants, or CPAs, they will suggest that you prepare for tax season early. This can help you be more organized, be able to write off as much as possible, and may lessen your stress in April. Now that we have finished 2021’s tax season, let’s discuss how you can prepare for 2022’s starting today.
Do Research On What Forms Your Need to Fill Out
Depending on your job and what type of organization you work for, you will have to fill out a specific form. For example, if you work for a standard corporation, you will likely need to fill out a W-2 form, which your employer should provide to you by January 31st of that tax year. If you only received money from this job and nowhere else, you shouldn’t need to fill out any other form. However, if you received money through stock trading, savings account interest, dividends, or any other avenue, you will need to fill out one or more additional forms (i.e.,1099).
On the other hand, if you do contract work, freelance work, or are self-employed, you will need to fill out a 1099-MISC. There are several different 1099 forms that people fill out depending on where their income came from. Some people have to fill out a few different 1099 forms to claim all of their earnings. So, you will need to do some research and perhaps speak with your tax professional to determine which forms to fill out based on where you earned money.
Save and Keep Track of All of Your Deductions
If you are among the group that has to claim earnings outside of a W-2, you may be able to deduct any expenses you have to do your job. This could be anything that you have purchased in order to do your services or make your products. In order to successfully deduct something in your taxes, you must save your receipts and order confirmations. This is to show the IRS the purchases were real in case they audit you. We recommend scanning your receipts and saving them digitally so you always have proof of the expense, without having to keep track of physical receipts. Below are some examples of deductions that may qualify as a write off, as long as you save your receipts.
If you attended college or classes that were associated with your line of work, you may be able to claim that as a deduction. Also, if you took out a loan to pay for the education, you may be able to write off the interest of the loan. You do need to fill out form 1098-T in order to claim education expenses on your 1099. There are limits on deductions for both qualified education expenses and loan interest.
It’s no secret that medical bills can be very costly, especially if you experienced something physically traumatic. So, the IRS allows people to write off certain medical bills if they were 7.5 percent or more of their adjusted gross income in many cases. Ask a CPA if you qualify for a medical deduction.
Did you give your hard-earned money to a charity or a non-profit this tax year? If so, you may qualify for a charitable deduction on your income tax. Your CPA can provide details.
State, Local, and Property Taxes
If you live in a state with state income tax, such as New York, or if you are subject to local taxes, you can deduct up to $10,000 from your federal income tax bill, so do keep this in mind if your state, local, or property taxes exceed this amount.
If you are an educator, did you know you can write off $250 worth of classroom expenses? To learn more about this, read our article, “What Tax Write-Offs are Available to Teachers?”
Retirement Fund Contributions
If you contributed to a qualified retirement account (e.g., IRA, 401(k)) this tax season, you can also deduct this from your taxes or claim a credit for it. This can be complicated, so you should talk to a CPA regarding your situation.
Make Your Quarterly Payments
If you work for a corporation or a for-profit company, your taxes are automatically deducted from your income. However, if you earn any money from an outside source or if you are a contractor, you will need to submit quarterly payments. These are payments that should be about one-quarter of the taxes you are projected to owe at the end of the year. You pay them once each quarter to the IRS, and then owe the final amount in April, based on your tax return. Just like how people with W-2s pay their taxes throughout the year through their paycheck, self-employed people and contractors should as well.
To make your quarterly payments, you can easily connect your bank account to the IRS website. Or, you can make your payments by mail, although this could be less secure in case your mail gets lost or stolen. We recommend paying your quarterly payments online as we’ve found it an easier way to track payments. Just remember the IRS will impose fines for underpayment of quarterly taxes, so be sure to discuss amounts with your CPA.
Get Help From Professionals
There are dozens of components that go into filing your taxes. With that being said, it’s generally considered best to work with a professional to file your taxes and prepare for next year. A certified public accountant in your state will be able to help you get your deductions and credits organized for potential write-offs. Come April, they will file your taxes for you. They will also advocate for you in case you get audited, which is invaluable.
When it comes to growing your wealth and making investments, it’s helpful to hire a wealth strategist. They can help you ensure you are making good investment choices outside of your day job. On the other hand, they can help you grow your business if you are self-employed. If you are in Long Island, New York, the financial professionals at Dayton and Sydney can help you.
Equitable Advisors, its affiliates and financial professionals do not provide tax or legal advice. The information presented here is for informational purposes only and provided based on our general understanding of the subject matter discussed. Please be advised that this document is not intended as legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.