By Jonathan Penta, Senior Wealth Advisor, Founder & Managing Director
As the April 18th tax filing deadline approaches, it serves as a stark reminder of how imperative it becomes to prioritize preparation for current and future tax seasons.
From keeping current on tax laws to remembering critical deadlines, available deductions, and potential audit triggers, readiness and planning becomes essential for a seamless tax filing process. That is why, as you are in the throes of this tax season, now is the perfect time to pause and reflect on how to better prepare for next year’s tax obligations. Instead of being caught off guard again, take proactive steps now to streamline the process and alleviate the stress in the future. This comprehensive guide will explore essential strategies and tips to ensure you’re well-prepared for next year’s tax season.
Planning Ahead
One of the most effective ways to ease the burden of tax season is to plan, potentially with the assistance of a tax preparer. By taking a few minutes each month throughout the year, you can save yourself time, stress, and hassle down the road. Here’s how:
- Organize Your Records: Create folders for all your tax documents, including receipts, forms, and statements. This simple step will make it much easier to compile your information when it’s time to file your taxes next year. Also, find out how long you need to keep tax records to avoid clutter. The IRS recommends that “The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep records supporting an item of income, deduction, or credit shown on your tax return until the period of limitations for that tax return runs out.”
- Update Your Information: Life and your tax obligations are constantly changing. If you’ve recently moved, changed your name, or experienced any other life events that may affect your taxes, update your information promptly. This will help ensure that your tax filings are accurate and up to date.
- Check Your Withholding: If you were unhappy with your refund or tax bill this year, it may be time to adjust your withholding. By reviewing your withholding throughout the year and making any necessary changes, you can better align your tax payments with your actual tax liability. Also, be sure to update your W-4 with your employer if needed.
- Consider Life Events: Life events such as marriage, divorce, having children, or changing jobs can significantly affect your taxes. Be sure to keep these events in mind and adjust your tax planning accordingly to avoid any surprises come tax time.
Understanding Key Concepts and Deadlines
Understanding key concepts and deadlines can help you confidently navigate the tax season and ensure you’re well-prepared for next year. A solid understanding of the following tax concepts is crucial for effective tax planning, so be sure to stay informed about:
Important Deadlines and Dates to Remember:
Understanding critical tax deadlines and dates, including those involved in preparing for tax season, such as the submission of W-2 forms and 1099 forms, is essential for staying on top of your tax obligations. Be sure to familiarize yourself with important dates such as filing, extension, and estimated tax payment deadlines to ensure compliance and avoid any penalties or fees.
Rates and Tax Brackets for the Tax Year:
Understanding the tax rates and brackets for the upcoming tax year is essential for estimating your tax liability and planning your finances accordingly. Familiarize yourself with the current tax rates and how they may impact your tax situation based on your income level and filing status.
Standard Deductions:
Knowing the standard deduction amount for the tax year is essential for determining whether it makes sense to itemize deductions or take the standard deduction. Stay informed about any changes to the standard deduction amount can help you decide which choice will maximize your tax savings benefits.
Tax Credits and Other Applicable Deductions:
Tax credits and deductions can help lower your tax bill and maximize your refund. Be sure to explore available tax credits and deductions, such as the Child Tax Credit, Earned Income Tax Credit, and education-related deductions, to take advantage of potential savings opportunities.
Retirement Plan Contribution Limits:
Maximizing contributions to retirement accounts, such as 401(k), 403(b), and IRA accounts, can help you save for retirement while taking advantage of deductions to reduce your taxable income. Stay updated on contribution limits for these accounts, and consider adjusting your contributions to optimize your retirement savings strategy.
Required Minimum Distributions (RMDs):
If you have retirement accounts such as traditional IRAs or 401(k) plans, be aware of required minimum distributions (RMDs) that may apply once you reach a certain age. Required minimum distributions are the minimum amounts you must withdraw from your retirement accounts each year. You must start withdrawing from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72. However, if you turn 72 after December 31, 2022, this requirement shifts to age 73. Failure to take RMDs can result in significant tax penalties, so plan and fulfill your RMD obligations accordingly.
Potential Tax Breaks:
Explore potential tax breaks, such as deductions for charitable contributions or gifts to family members, to minimize your tax liability and maximize your tax savings. Consider strategic planning techniques, such as bunching charitable contributions or utilizing donor-advised funds, to optimize your tax strategy while supporting causes you hold dear.
Capital Gains Rates:
Understanding capital gains rates and how they apply to your investment income is essential for managing your tax liability on investment gains. For instance, the IRS states, “Net capital gains are taxed at different rates depending on overall taxable income, although some or all net capital gain may be taxed at 0%. For taxable years beginning in 2023, the tax rate on most net capital gain is no higher than 15% for most individuals.” Being aware of the tax implications of buying, selling, or holding onto investments and considering tax-efficient investment strategies can help to minimize capital gains taxes.
Consult with a Professional:
Please do not underestimate the value of seeking professional advice from a tax preparer regarding tax planning, including understanding potential deductions. A knowledgeable advisor can provide personalized guidance, aligning your tax strategy with broader financial goals. By aligning your tax planning efforts now with your long-term financial goals, you pave the way for enhanced after-tax investment returns and optimize your overall wealth management approach.
By starting to plan and prepare now, you can set yourself up for success later. Mastering tax planning requires planning ahead and carefully considering important deadlines, deductions, and other key factors. Taking proactive measures today, such as planning and seeking professional advice, sets the stage for future success and alleviates stress and uncertainty surrounding tax obligations, empowering you to focus on achieving your long-term financial aspirations with confidence and clarity.
About Jonathan
Jonathan Penta, CEPA®, is Senior Wealth Advisor, Founder & Managing Director at Penta Wealth Management, a financial services firm based in Wellesley, Massachusetts, helping individuals, families, and business owners pursue their goals with customized private wealth management solutions. An advisor since 2001, Jonathan’s love for investments and his desire to be a true fiduciary for his clients led him to establish his firm, allowing him to provide investment solutions and guidance without limitations. He helps clients in the greater Boston area address their most pressing financial challenges through a consultative process that allows him to deeply understand their values and goals before developing solutions tailored to their unique needs. Jonathan’s dedication to his client’s success drives him and makes his job rewarding.
Jonathan holds a finance degree from Boston College’s Carroll School of Management and is a Certified Exit Planning Advisor with a CEPA® designation. Jonathan lives in Wellesley, MA, with his wife, Paula, and their three children, Nicolas, Michael, and Juliana. An avid sports fan, he enjoys fitness, tennis, skiing, coaching youth soccer, and spending time with his family. To learn more about Jonathan, connect with him on LinkedIn.
Disclaimer: The information provided in this blog is intended for general informational purposes only. It is believed to be reliable; however, we cannot guarantee its accuracy or completeness. It is essential to understand that laws, regulations, and circumstances may change, and the content provided in this blog may only sometimes reflect the most up-to-date information. Readers are strongly encouraged to consult with qualified professionals, including attorneys and financial advisors, to ensure that actions or decisions align with their needs, objectives, and overall estate plan. Investment and Advisory Services are provided by Penta Wealth Management LLC and Empirical Asset Management LLC (“EAM”), a registered investment advisor. Advisory services are only offered to clients or prospective clients where EAM and its representatives are properly licensed or exempt from licensure.
