Even though it may feel like you only just submitted your 2020 annual tax returns, tax season is back again which means April 15th is just around the corner. Whether you work with a professional tax planner or not, now is a great time for everyone to refamiliarize themselves with how to properly prepare their annual taxes. A little preparation ahead of the April 15th deadline will significantly help minimize potential delays and ensure compliance with federal, state, and local tax laws.
We have put together a helpful tax preparation checklist to ensure your 2021 tax returns are prepared correctly and submitted on time. Then, we dive into tax planning and mitigation opportunities to consider throughout the remainder of 2022 to help maximize next year’s returns through money-saving deductions, strategies, and tax credits.
2021 Tax Preparation
Before you can prepare your 2021 taxes, you will need a variety of specific tax documents in order to fill out your tax return forms. These documents help the IRS determine the money you received during the previous year as well as any relevant deductions that may impact your taxable income. Which documents you need will depend on how you choose to file your taxes. If you are planning to take a standard deduction, some of the most common documents you will need include:
Information on Income
- W-2 forms
- 1099 forms including 1099-G forms (unemployment income, or state and local tax refunds), 1099-S forms (income from sale of a property), and SSA-1099 forms (Social Security benefits received)
- Alimony received documentation
- Rental property income and expenses
Adjustments to Income
- 1098-E form (student loan interest paid)
- Records of IRA contributions made during the year
- Records of Medical Savings Account (MSA) contributions
- Alimony paid
- Self-employed health insurance payment records
If you plan to itemize your deductions, you will need additional documentation. These documents include:
- Childcare costs
- 1098 form (Mortgage interest, private mortgage insurance (PMI), and points you paid)
- Investment interest expenses
- Charitable donations
- Medical and dental expense records
- Records of home business expenses, home size/office size, home expenses
- Documentation of other taxes paid (real estate, state and local income tax, etc.)
Once you have all the necessary forms and documents, you can begin to prepare your taxes. For most people, however, it can feel overwhelming to try and determine which specific documents they need as well as how to properly account for them in their tax filing.
JL Smith has put together a collection of helpful resources that anyone can use to make sure they have everything they may need to successfully submit their 2021 taxes:
If someone isn’t sure what kinds of deductions they are eligible for, which way to file makes the most sense for their situation (standard deduction or itemized), or how to get ahold of the right paperwork necessary to complete their taxes, it may be best to work with a professional tax planner. Professional tax planners help individuals, families, and businesses reduce stress and save time and money by ensuring their tax returns are prepared accurately and filed on time, every time.
Tax Planning Strategies for 2022
Year-round tax planning is the key to strategically reducing your overall financial burden come tax season. When you work with a tax planning specialist, you can develop a comprehensive income strategy that minimizes your current and future tax liabilities. Tax planners can also help identify areas to maximize returns on your short- and long-term income and retirement distribution channels. Before you begin tax planning, however, there are a few things you will want to familiarize yourself with to better understand how you can minimize your tax burden:
In the United States, people with higher taxable incomes are subject to higher tax rates. In contrast, people with lower taxable income are subject to lower tax rates. The seven federal tax brackets are: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Knowing which tax brackets you fall into will help you begin to understand what you will owe in taxes each year as well as inform strategies you can implement to reduce that amount.
Tax Deductions vs. Tax Credits
Tax deductions reduce your overall tax bill because they are specific expenses you’ve incurred that can be deducted from your taxable income. Tax credits are similar but different. Tax credits give a dollar-for-dollar reduction in your tax bill. For example, a $100 tax credit will reduce your tax bill by $100
Standard Deduction vs. Itemizing
A standard deduction is a blanket, no-questions-asked tax deduction set by congress each year. The amount of a standard deduction is based off an individual’s filing status:
- Married, filing jointly
- Married, filing separately
- Head of household
Itemizing is when you opt-out of the standard deduction and instead of filing for each tax deduction an individual qualifies for one by one.
Common Deductions and Credits
There are hundreds of available deductions and credits that can significantly reduce an individual’s tax burden. Some of the most common deductions and credits include:
- Child tax credit
- Home office expenses
- Charitable contributions
- Property taxes
You never know if you will be audited by the IRS or will need to file a claim for a credit or refund after you filed your original return. Hold onto important forms and tax records like W-2 forms, bank statements, and invoices for at least three years to minimize risk and ensure you can support any future claims.
A professional tax planner can help wade through all the different income distribution approaches to determine what combination of strategies will most effectively minimize your tax payments while still meeting all federal, state, and local tax laws.
Make Tax Planning Simple
At the end of the day, the best method for mitigating tax payments and maximizing potential deductions and credits is to remember tax planning should happen all year long, not just during tax season.
JL Smith’s tax planning and wealth management services are designed to help you achieve financial freedom 365 days of the year, not just on April 15th. As part of our comprehensive financial services, we offer tax planning strategies for:
- Making charitable contributions
- Estate and legacy planning
- Liquidating stock or other assets
- Tax-loss harvesting
- 401(k) and IRA plan optimization and distribution
- Maximizing health savings account (HSA) contributions
- Avoiding Medicaresurcharges
- Life insurance, annuities and long-term care insurance
- Minimizing taxes in retirement
If you’re ready to evaluate which tax planning strategies are best for you and your family, contact us! Our expert advisors are ready to help you reach your 2022 financial goals!