The 9 best tips to help you prepare for tax-filing season

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As the end of the year approaches, it’s a good idea to start thinking about how you’ll handle your federal tax return. Some taxpayers are still getting familiar with the Tax Cuts and Jobs Act of 2017, which has been in effect for four tax seasons.

That tax law capped state and local tax deductions at $10,000, doubled the standard deduction, doubled estate tax exemptions, put new limits on the deductibility of home equity debt, and changed the tax brackets. It’s a lot to keep track of, so taxpayers shouldn’t wait until the April 15 filing deadline nears to plot their best course.

The IRS has yet to set a start date for accepting 2021 returns (the start date for 2020 returns was Feb. 12, much later than usual). Regardless of when tax season 2022 will start, it pays to make sure you’re up to date and doing all you can to reduce your tax bill, even if your financial situation is simple and straightforward.

1. Decide who will prepare and file your taxes

If you had major changes in your life in 2021 — maybe you got married or divorced, started your own business or had to claim unemployment benefits — your taxes will be more complicated. As a result, you might need to hire a CPA or other tax professional to prepare and file your taxes.

Just don’t wait until the calendar flips to April to make that decision because it could end up costing you.

The average fee in 2020-2021 for a professional to prepare and file an itemized Form 1040 with Schedule A, Schedule C (for sole proprietors of a business) and a state tax return was a hefty $515, according to the National Society of Accountants.

Many tax professionals will charge more as the April 15 filing deadline closes in. Or you could find yourself scrambling to find someone who’s not too busy to help you.

2. Can’t afford a tax pro? Check out alternatives

If you’re not comfortable doing your own taxes and can’t afford to go to a CPA or a tax giant such as H&R Block, there are options that won’t cost you a cent.

Free File Alliance is a coalition of tax software companies that partner with the IRS to help U.S. taxpayers e-file their returns. Your adjusted gross income cannot exceed $72,000 a year to qualify for the service.

The Volunteer Income Tax Assistance program (VITA) uses IRS-certified volunteers to offer free basic tax preparation and e-filing to people who earn less than $57,000 a year, people who are disabled or whose English is limited.

The IRS has an online location tool for hundreds of free tax preparation sites in the U.S.

In addition, the AARP Foundation Tax-Aide offers tax-preparation assistance to people 50 or older or those who can’t afford a professional tax preparer.

3. Make sure beneficiary designations are up to date

Beneficiary designations won’t affect your taxes now, but they do affect the taxes of your heirs in the future.

Mike Moyer, certified financial planner and senior vice president/senior wealth strategist at PNC Wealth Management, says the end of the year is a great time to review your beneficiaries and make any changes you feel are needed.

Why is that important? Down the road, it will help minimize the taxes your beneficiaries and heirs pay on your assets after you die.

“If something unexpected happens to you, having your designations lined up and properly coordinated has a dramatic effect on the tax bills of who receives your assets,” Moyer says.

4. Max out retirement plan contributions

If you’ve been stingy about funding your employer-sponsored 401(k), 403(b) or other tax-deferred retirement account, do yourself a favor and increase your contributions. The money you put in these accounts reduces your taxable income for the year, which reduces your tax bill. It isn’t taxed until you withdraw it.

For 2021, 401(k) contribution limits are $19,500, plus $6,500 in catch-up contributions if you’re 50 or older.

If you have an IRA through a broker or bank, contribution limits for 2021 are $6,000 plus $1,000 in catch-up contributions.

Lisa Greene-Lewis, CPA and blog editor at TurboTax, says people who can’t afford to make the maximum contributions should at least try to contribute the amount that will be matched by employer contributions. Think of the employer match as an immediate return on your money. It’s essentially free money, subject to your employer-sponsored retirement plan’s vesting schedule. And all those funds are tax-deferred and grow tax-free.

Many experts encourage people to contribute as much as possible to their health savings account (HSA), assuming they have a high-deductible health plan and are eligible. These accounts are triple tax-advantaged on the federal level, meaning you get an above-the-line deduction for contributing, and that growth in these accounts as well as withdrawals are tax-free if used for qualified health expenses. Additionally, employers often have a matching contribution for these accounts with no vesting schedule, meaning the employer contributions are always your money.

5. Shield yourself from tax scams and fraud

As tax season approaches, many people start getting phone calls, emails and text messages from entities claiming to be the IRS. These are scams. “The most important thing right now is to not respond to telephone calls or emails from folks who pretend to be the IRS or the U.S. Treasury,” Lipman says. “Those organizations are never going to call you on the phone.”

U.S. mail is the only way the IRS will correspond with you, unless you go into litigation, Lipman notes.

She also warns against “shopping a refund” to find a preparer who promises to get you a bigger refund. The tax preparer who makes promises like that could be unscrupulous and lead you into deep trouble.

“The concept of getting a bigger refund is antithetical to how the tax laws work,” Lipman says, noting that taxpayers sign their returns under penalties of perjury and are responsible for any bad information, whether it’s a mistake or fraud.

“You have to be very careful about your paid preparer,” Lipman says. “Make sure they are well-credentialed.”

The IRS website has a list of registered tax preparers to help you avoid dishonest “professionals.”

Direct deposit is another safeguard. Set up direct deposit with the IRS if you expect a refund; if you owe money, be sure to send it through IRS Direct Pay.

6. Consider ‘bunching’ deductions

The standard deductions are nearly double what they used to be, making it hard to itemize. The 2021 deductions are:$12,550 for individuals,$18,800 for heads of household and 25,100 for married couples filing jointly. Taxpayers who don’t have enough deductions to surpass those thresholds take their standard deduction.

Ken Moraif, a certified financial planner and senior adviser at Retirement Planners of America (formerly called Money Matters), recommends “bunching” deductions to exceed the thresholds, if possible. Bunching is when you time expenses by pushing deductible expenses into the same calendar year. Moraif says this can be achieved by moving forward certain deductions this year, such as charity donations, or prepaying January’s mortgage payment.

“Doubling the charitable contributions in one year plus other itemized deductions may allow a person to be over the standard deduction and itemize every other year,” Moraif says.

Aside from charitable giving, consumers can accelerate tax deductions, such as a property tax bill due early next year or a big medical bill. These can be beneficial when itemized using the “bunching” method.

7. Take your required minimum distributions, or RMDs

If you are 72 years old and have enjoyed watching your 401(k) or IRA grow tax-free without touching it, the IRS wants its share. You must take your required minimum distribution (RMD) by Dec. 31, or you will be penalized 50 percent of the RMD amount.

“The whole idea behind an RMD is the IRS has allowed these investments to increase in value tax-deferred, so when they come out, they make sure that the IRS is getting the tax revenue it’s owed,” says Moyer of PNC Wealth Management.

The amount of your RMDs is based on your age and the year-end values of your retirement accounts. Moyer recommends account holders work with a professional to ensure they are taking the correct distribution amount.

8. Think long-term: Convert an IRA to a Roth

A Roth IRA has two big tax advantages over a traditional IRA: Withdrawals are not considered income for federal (and usually state) income tax purposes, and you do not have to take RMDs from them every year starting at age 72.

“You have the ability to leave the funds in the account earning interest as long as you like, with no requirement to take the income even when not needed,” says attorney Kevin J. Moore, whose Pasadena, California, law firm specializes in taxes and estates. “With an IRA, at the age of 72, you must start taking the RMD and you must make a tax payment on that income. You do not have the ability to forgo RMDs and allow the funds to grow tax-free.”

Just know that when you convert an IRA to a Roth IRA, it is considered taxable income, which will raise your tax bill for that year. Generally speaking, it’s best to convert to a Roth IRA in a low-income year.

9. Don’t ignore the IRS

Taxpayers who don’t file returns and owe taxes, or who file but don’t pay taxes on time are risking serious penalties. The IRS can seize assets if necessary.

If the IRS has been sending you letters because it found an error on your return or claims you owe back taxes, respond in writing — and don’t delay.

“If you don’t respond to IRS correspondence, you lose. It’s as simple as that,” says UNLV law professor Lipman. “The IRS has strong lien and levy powers. … You will be surprised if your wages are garnished or there is a lien on your house. You really need to respond to notices in a timely manner.”

Make copies of your correspondence and use only the U.S. Postal Service, whose postmark is your proof of timeliness.

Don’t assume that a letter from the IRS is the end of the matter. “Many people think that it’s conclusory, but they always give you time to respond to demonstrate that you get the deduction or whatever,” Lipman says. “If you respond to them, they really do want to work with you. If you do not respond, they’ll assess the deficiency and start the collection action.”

Whatever you do, says Lipman, “Do not ignore them; they will not go away.”

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Written by
Libby Wells
Contributing writer
Libby Wells is a contributor covering banking and deposit products. She has more than 30 years’ experience as a writer and editor for newspapers, magazines and online publications.
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