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This article was fact-checked by our editors and reviewed by Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®.
If you’ve recently finished filing a tax return, a recommendation to start preparing for next year’s taxes might sound a little irritating.
After all, there’s a reason why many taxpayers wait until April to file their returns each year. Even with help from free online tax-preparation services like Credit Karma Tax®, filing your taxes can be aggravating.
But if you own a business, plan to itemize your deductions, or simply want to maximize your tax refund, thinking about your taxes now may pay off next year when you have to file this year’s taxes. Here are 10 tips that can help you in preparing for your taxes.
10 things to help you with preparing for taxes
“Taxes are not a once-a-year event,” says Micah Fraim, CPA, a Virginia-based tax advisor. “Your tax return is a reflection of the totality of what was done throughout the year.”
1. Review your filing status
Your filing status can affect how much you owe in taxes each year, and whether or not you have to file at all. Consider whether your filing status will change during the year.
For example, if you’re single but planning to get married by Dec. 31 of the current tax year, you may choose to file a joint or separate return with your future spouse when you file your taxes next year.
Alternatively, you may be filing as a single taxpayer if you expect to get divorced during the year, or as head of household if you’re single and having a child or taking on another dependent.
2. Look back to last year’s return
Hopefully by now you’ve filed your tax return for last year, or filed for an extension. If you’ve already filed your taxes for the current tax year, look back and think about areas that were problematic or extra stressful. Then think about how you can alleviate that stress for next year.
For example, if you did your own taxes and had trouble with the math, consider using a free online tax-preparation service like Credit Karma Tax® next year. If you had trouble verifying contributions you made to charity, plan how you’ll keep better records so it’s easier to claim a charitable deduction.
3. Decide how much tax you want withheld
If you received a big refund on your tax return last year, it may mean your employer is withholding too much tax from your paychecks.
Decreasing those withholdings might “[give] you access to more of your money throughout the year to invest or pay down debt,” says Fraim, “assuming you have the discipline to actually save the funds.”
If you’d rather have a bigger paycheck to work toward your financial goals, instead of that potentially big refund next year, meet with your payroll manager to review your withholding allowances on your W-4 form. Just be careful not to reduce your withholding by too much. Overly reducing your withholding may result in having too little tax withheld throughout the year, and could mean a big tax bill in April and potentially a penalty for failing to properly estimate your taxes as well.Filing out your W-4 to optimize your refund
4. Set up your system
There’s more than one way to organize your tax records, but having some kind of filing system will help you keep everything in one place. Don’t wait until January to start organizing important documents. While many important tax documents will arrive in the beginning of the year, some — such as receipts for deductible expenses — will crop up throughout the year.
5. Save documentation for deductible items
If you own a business or plan to itemize your deductions, you should hold onto your receipts and other documents for eligible expenses. You won’t need to submit your receipts with your tax return, but you may need to substantiate your expenses if the IRS audits your return.
Do the same for home improvements, especially if you’re planning to sell your home. The amount you spent on home improvements increases your adjusted basis on your home, which is what the IRS uses to determine how much tax you owe when you sell it.
6. Keep track of your charitable contributions
When you do good for others, you deserve to get some tax benefits. While you can include charitable contributions to qualified organizations in your itemized deductions, doing so may require a little extra documentation. For example, you can’t deduct a contribution of more than $250 unless you have a written acknowledgment from the organization.
Also, noncash contributions may require different records, such as a description of what you donated and its fair market value. Be sure to get the full tax benefit of your generosity by keeping good records of all your charitable contributions to qualified organizations throughout the year.
7. Consider saving more for retirement
If you have a 401(k) or traditional IRA, you may get a tax break by contributing more money to your retirement account. That’s because contributions you make to these accounts are typically deductible on your tax return.
Keep in mind, though, there are income restrictions and contribution limits that determine how much you can put in an IRA, and deferral limits on how much you can put into your 401(k). Be sure you understand what those limits are, and how much you’re able to contribute for the year.
8. Plan for estimated taxes
As we mentioned before, seriously underpaying your taxes throughout the year can have very negative consequences. If you expect to owe at least $1,000 in taxes when you file, the IRS generally requires that you make estimated tax payments throughout the year. This is especially important for business owners or self-employed individuals who generally don’t pay income taxes on their earnings.
Note that you may need to work with a tax accountant to determine how much to set aside and pay each quarter.
9. Don’t make financial decisions based on potential tax breaks
The IRS offers a slew of tax credits and deductions that have the potential to reduce your tax liability. But if you’re spending money strictly for the tax break, you may end up losing money on the deal.
For example, you can deduct charitable contributions you make throughout the year if you itemize your deductions and donate to qualified charitable organizations. But if you donate $1,000 solely to get a tax deduction, and don’t first ensure your contribution meets deduction requirements, you could be out $1,000 with no tax break to show for your donation.
10. Familiarize yourself with new tax rules
The Tax Cuts and Jobs Act that took effect in December 2017 made big changes to the U.S. tax code.
The tax reform means two things for you.
1. Some of the tax breaks you might have taken advantage of in the past are gone.
2. There may be some new tax breaks you can use when preparing your taxes.
Check out our tax reform review to see the biggest changes and start thinking about things you can do to take advantage of them.How could tax reform affect your paycheck in 2018?
Many taxpayers consider filing taxes a stressful experience, but it doesn’t have to be. Preparing for your taxes throughout the year can make the process of filing in April go much more smoothly.
And don’t forget, when it’s time to file, Credit Karma Tax® can walk you through your return step by step and help you find ways to maximize your refund along the way.
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.