Question of the Week
Five Things To Do Right After You File Your Tax Return
Happy Friday all!
This week we wrapped up tax season 2022 with the passing of the personal income tax deadline on Monday the 17th.
Enjoy that feeling of relief for a minute. Savor the idea that you don’t have to run around collecting documents, checking numbers, and worrying about whether you understood the rules. But just for a little while. It’s tempting to throw your return in a drawer or a folder on your desktop and not think about your income or deductions for another year, but here is my semi-annual reminder of what I want you to do a few things while your taxes are fresh on your mind.
Review Your Return
Your tax return is probably the last thing you want to look at right now, but now, with the details fresh in your mind, is the best time for a review. Why?
First, you can catch mistakes. All of us, including professional tax preparers, can make errors. And even with the best tax preparation software, anyone can still transpose some numbers or forget to enter something altogether. Go through your return and ensure your income figures and the amount of tax withheld match what was reported on your tax documents. If you find a mistake, you can always file a 1040X and make adjustments (which you can now file electronically). Also, don’t forget to confirm that the IRS and your State Agency accepted your filing. You or your tax preparer should have received Form 9325 confirming the date it was accepted, with the submission ID of the return.
Second, you can start planning for next year. Any help takeaways from the return? Use the tax return to guide the types of deductions you’ll need to track this year. For example, maybe you didn’t get to deduct the maximum last year. With a bit of planning this year, you can. For example, if you started itemizing last year, think about maximizing charitable contributions next year. Or, if you file a Schedule C business return, you can take advantage of more business-related expenses you didn’t track the previous year. Taking 15 minutes to understand and review your previous return will save you a lot of time, money, and stress in the following year. If you need a primer on what you can and cannot deduct, you can get more information here.
Get Organized Now
Last year’s tax return can also tell you which documents you’ll need to gather for this year, giving you a head start in assembling the required information. It’s easy to lose track because we get so many tax documents. Are you paying student loan interest? You have a 1098-E. Got some interest from a bank account? Look out for your 1099-INT. You can create a checklist to identify what you need quickly. Once you get the documents, keep them all in one envelope or folder for easy access.
Adjust Your Withholding to Keep Your Money
The moment of truth comes when you finally finish your return and figure out whether you owe or will get a refund. Most people are elated when they get a refund (the larger, the better, right?). And others feel inadequate or like they’ve done something wrong because of the stigma associated with owing the IRS.
However, owing is good, to a certain extent. You’ve kept more of your money to spend how you like rather than giving the government an interest-free loan. The time value of money principle states that money is worth more to you now than in the future because of the interest you can make in it. So, keep more of your money in your pocket.
Adjust your W-4 exemptions to get more money in your monthly paycheck if you’ve received a considerable refund. If you owe, make sure it’s not so much that you can’t pay it back. If it is too much to pay, you can have more money taken from your paycheck or make additional quarterly payments to ensure you can pay any balance next year.
Deal with Your Debt
As I said, owing is good for you. The problem comes when you owe more than you can pay back or incur an underpayment penalty for not paying enough during the year. If you run into this situation, I’ve already given some suggestions for dealing with your debt. However, you will want to resolve the problem right away because penalties and interest accumulate while you delay.
In the future, you can avoid an underpayment penalty if you either owe less than $1,000 in tax after subtracting your withholding and estimated tax payments or if you’ve paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.
If you incur the penalty, you must file form 2210 to determine the amount you owe. Then, you’ll want to adjust your W-4 withholding with your employer or figure out what you need to pay to the IRS quarterly to have the right balance.
Review your Budget
Lastly, now that you have your total gross income and the total amount of tax you pay in front of you, it’s an excellent time to review your yearly budget. You can use the figures on the return to make sure you’re budgeting a precise amount of income and expenses. For couples out there, you can use your tax return to calculate the appropriate percentage each of us contributes to our joint household bills.
This step is also especially important as we come to the end of the year. Since you are forced to look at your income when you file your return, use the time to review your income and expenses. Maybe you can invest more money into your business, or perhaps you need to be paying yourself more.
Quote of the Week
“I believe luck is preparation meeting opportunity. If you hadn’t been prepared when the opportunity came along, you wouldn’t have been lucky.” – Oprah Winfrey
Task of the Week
Go through the steps I list above. You’ll thank me for it come next tax season. If you filed an extension, do yourself a favor and get your information together now.