Preparing for Tax Season: Ep. 3-6

01/17/2024 – Ep. 3

Get Your Documents – What Do You Need?

To start your preparation for tax season, the first step is to keep your documents organized as you receive them. In order for your tax preparer to efficiently file your taxes (and potentially lower your preparation fee by saving them time), it can be helpful to organize your documents into two separate categories listed below.

Income Documents

“Income” documents include items such as your W2, 1099s, Social Security statements, and documents that you receive for any other income source. W2s report salaries and wages, while 1099s can report retirement distributions, dividend income, and interest income.

Deduction Documents

These documents include items such as your mortgage interest, property taxes, and charitable contributions. Your tax preparer will use these documents to calculate whether the standard deduction or itemized deduction is more favorable for your return.

Miscellaneous Documents

Other documents or information to provide include the amount spent on childcare throughout the year, business expenses and income (if you are self-employed), and amounts spent on higher education, just to name a few.

Many accounting firms provide a “tax organizer” to help clients know what documents need to be provided. Make sure to reach out to your tax professional to receive a copy!

01/24/2024 – Ep. 4

Standard vs. Itemized Deductions

Each taxpayer is entitled to claim either the “standard” deduction or “itemized” deductions. The standard deduction is provided to each taxpayer. For tax year 2023, the standard deduction is $27,700 for a Married Filing Jointly (MFJ) couple ($13,850 for a single filer). A tax “deduction” lowers your taxable income. For example, let’s assume that a MFJ couple had $100,000 in gross income. After claiming the standard deduction, their taxable income would be $72,300.

Itemized deductions are the combination of a variety of deductions. These deductions include charitable contributions, mortgage interest, property taxes, and state and local income taxes (capped at $10,000). Unreimbursed medical expenses can also be included as itemized deductions, but the only amount that can be claimed is the amount that is greater than 7.5% of AGI.

In order for a taxpayer to claim itemized deductions, they must add up to more than the standard deduction listed above. Even if you believe your itemized deductions are less than the standard deduction, it still makes sense to provide your tax preparer with these figures. Some states have much different thresholds for standard and itemized deductions, so it could help you to lower your tax liability on your state return (even if it doesn’t make a difference on your federal return).

01/31/2024 – Ep. 5

Credits vs. Deductions

Tax deductions and tax credits are offered to each taxpayer. Tax deductions lower your taxable income, while tax credits lower your actual tax liability. Let’s take a look at a couple of examples:

Tax Deductions

Bill and Sally have a combined Adjusted Gross Income (AGI) of $100,000. They claim the standard deduction of $27,700. After subtracting the standard deduction, their taxable income (what they actually pay tax on), is $72,300.

Tax Credits

Bill and Sally’s federal tax for the year came out to be $8,200. They had $7,000 withheld throughout the year, leaving them with a tax liability of $1,200. Bill and Sally have two children that each qualify for the child tax credit ($2,000 for each child). The $4,000 credit lowers their tax liability from $8,200 to $4,200. Instead of owing $1,200, they will receive a tax refund of $2,800.

The most common tax credits include the child tax credit, dependent care credit, and educational credits. Make sure to keep good records on amounts spent for childcare and on higher education. Your tax preparer will need these figures to determine eligibility for the dependent care credit and educational credits.

02/07/2024 – Ep. 6

Tax Planning for 2024

The best way to prepare for tax preparation is to begin at the start of the year. Although your 2024 tax return won’t be filed until the spring of 2025, it’s wise to begin taking proactive steps to ensure tax efficiency throughout the year. It’s highly recommended to sit down with your tax professional to have them guide you through any tax changes that are anticipated, as well as to review your rates of withholding. It’s far easier to adjust your tax withholding early in the year than near the end of the year. Make sure to reach out to your tax professional or financial planner with any financial changes that occur through the year so that taxes can be properly planned for. Lastly, it’s important to keep good, organized records throughout the year. This helps to ensure that no potential deductions or credits are missed.

Want to talk more? Call or visit our friends at Lockshield Partners

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Miranda Power