Disclaimer: Upstart is not a financial advisor or a tax accountant, this blog post is intended for informational purposes only and should not be taken as legal, tax, or accounting advice. Always consult a professional tax advisor for your specific situation.
It’s time to get your taxes in order, even though many of us would rather be doing anything else, including spending a day in jury duty (16 percent) or have minor surgery (6 percent).
Or maybe you’re looking forward to doing your taxes because you’re one of the 73.2 percent (nearly 96 million people) who received refunds in 2019.
Whether you’re dragging your feet or are looking forward to snatching up that refund, understanding the following tax tips will help you better prepare and get through this season.
1. Understand if your tax bracket changed
Your tax bracket is the range in which you fall, depending on your adjusted gross income (AGI) or the amount you take home.
Your AGI determines how much of your income should be taxed and is the basis for deductions and credits. A person’s AGI would be calculated after deducting their health insurance premiums or contributing to a 401(k) or IRA, for example.
In recent years, the Tax Cuts and Jobs Act lowered tax rates, but also changed how taxes are calculated due to the increase in standard deduction and loss of personal exemptions. If you’ve discovered you’re in a new tax bracket, you could end up paying more in taxes. In this instance, consider changing your withholding to pay a bit more during the year, which may lessen the amount you owe during tax season.
2. Max out your retirement plans
Consider contributing and maxing out your 401(k), 403(b) or IRA/Roth IRA accounts. This money will reduce your taxable income and your tax bill. The reason for this is because it’s not taxed until you withdraw the funds from your retirement accounts.
Each year, the government raises the amount you can contribute. In 2019 you can contribute up to $19,000 and $6,000 in catch-up contributions if you’re over the age of 50. The contribution limits have increased by $500 in 2020.
For IRAs, you can contribute up to $6,000, plus another $1,000 in catch-up contributions if you’re over 50.
If you have a 401(k) offered by your place of employment, try to contribute the amount that is matched by your employer (if this is offered). This is essentially free money and can be a helpful strategy to put more money into your account. It can help lower your taxable income, especially if you can’t afford to max out contributions in the year.
3. Report all of your income
Just assume that the IRS will find out if you haven’t reported all of your income. There’s nothing worse than getting a letter from the IRS months after the tax season that says you didn’t report all of your income and owe more taxes, plus penalty fees.
If you’re one of the 44 million Americans who have a side gig, you’ll have to report all of the earnings to the IRS. Hopefully you’ve stayed organized throughout the year and have kept an accurate track of how much you’re earning.
You should receive a 1099 form from your clients or bank/brokerage companies if you have a side hustle and a W-2 form from your full-time employer.
4. Consider using a tax professional to help you file properly
In December of 2019, the IRS received 138 million tax returns for the 2018 tax year. Of those that were filed, tax professionals took care of 80 million of them while 57 million were self-prepared.
Sometimes paying a professional to handle the hard stuff is worth it, even if it costs you to do it. Having peace of mind that a professional will prepare your taxes, especially if your taxes are more complicated than the single, no dependent, no investment-having individual.
Not only that, a tax pro can help you figure out where you could be maxing out and potentially getting a return or saving money. Consider asking your friends, family, or colleagues for a recommendation to find a reputable tax professional.
5. Look at your paycheck stub for your 2020 taxes
It’s always a good idea to prepare for the following year’s taxes, in case you want to change the amount of your refund or the amount you’re getting each month in your paychecks.
Find out how much you’re having withheld from your paycheck. While some enjoy overpaying in order to get a refund, others would rather have the monthly amount in their bank accounts.
Depending on which camp you fall into, find out if the amount being withheld works for you or if you want to adjust it. You can use the IRS’ calculator to help and adjust your withholding for 2020 if you need to.
Write down due dates on your calendar
Even if you are planning on requesting an extension, you still have to pay whatever you owe by this date. If you don’t, you will be hit with penalties and interest from the IRS. Doing your taxes isn’t the most exciting part of your year, but getting it done early and right are two important factors so that the IRS doesn’t haunt you for the rest of the year.