Benjamin Franklin once said “to fail to plan is to plan to fail.” This adage certainly applies to tax planning.
Although the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated many deductions outright, there are exceptions. Certain deductions still exist but are being phased out, whereas others will expire after a set time. This means good tax planning remains an important aspect of good financial health.
Following are six steps you can take right now to prepare for your future taxes:
1. Adjust Withholdings
Determine whether you are someone who takes out more taxes every pay period so that you get a tax return, or whether you want the benefit of having the cash on hand right now. Adjust your withholding accordingly by filing a new Form W-4.
2. Organize Receipts
Start organizing your receipts now so you don’t accidently miss a deductible expense or a tax credit. Check the standard deduction for your situation, and consider whether you might need to itemize.
Having your receipts ready eases the tax preparation process. You should have the following categories of receipts and other documents handy:
- Last year’s federal, state and local tax returns
- Receipts/statements/cancelled checks for medical and drug costs, health savings account contributions, charitable contributions, contributions to retirement plans
- Business travel and meal expenses (including a mileage log)
- Childcare expenses
- Receipts related to your home, including mortgage and line-of-credit expenses, repair and renovation expenses, real estate and school taxes (not all of these will be deductible, but they may help reduce your basis when you sell your home)
- Any receipts related to a home purchase or sale
- Receipts related to life events like marriages, divorces, births and deaths
3. Review Your Investment Strategy
Short-term investments (those held 12 months or less) don’t get special treatment, but long-term investments (those held longer than one year) are typically taxed less.
4. Review Your Charitable Contribution Strategy
If you make large contributions, it may make sense to alternate the years in which you make the contribution so you can exceed the threshold for the standard deduction.
5. Evaluate Tax Credits
Consider whether you’re eligible for any tax credits so you can take full advantage of them. Tax credits are important because they are dollar-for-dollar reductions in the amount of taxes you owe. These credits may be refundable or nonrefundable. Refundable tax credits can reduce your tax liability below zero, while a nonrefundable credit cannot.
6. Review Your Estate Plan
No one knows what is going to happen in the future. TCJA changed many deductions related to gifts and estates; take this time to review the changes and make sure your estate plan reflects your wishes and is current. Keep in mind that some of the provisions now in effect are due to sunset in 2025.
If you need help preparing for your future taxes, schedule a consultation with us today.