Tax Season Wrap-Up: Preparing for Next Year

Tax season: It's the time of year that can stir up a cocktail of anticipation and dread. Whether you've just breathed a sigh of relief after filing or you're already dreading next year's forms, there's no time like the present to start preparing for the next tax season. Here are strategies to use this year's tax return as a springboard for better preparation and potentially more favorable outcomes next year.

1. Analyze This Year’s Return Start by taking a close look at your recent tax return. Did you get a large refund or end up owing money? While a hefty refund might feel like a windfall, it essentially means you’ve given the government an interest-free loan. If you owed a significant amount, you might not be withholding enough. Use this insight to adjust your withholdings for next year to aim for a more balanced outcome.

2. Adjust Your Withholdings If your financial situation has changed — maybe you got married, had a child, or bought a house — it's crucial to update your W-4 form with your employer. The IRS offers a Tax Withholding Estimator tool online to help you determine the right amount to withhold. Adjusting now can help you avoid surprises next tax season.

3. Maximize Retirement Contributions Contributing to retirement accounts not only secures your future but can also reduce your taxable income. If you received a refund, consider using it to max out contributions to your IRA or 401(k). For 2023, the IRA contribution limit is $6,000 ($7,000 if you’re 50 or older), while the 401(k) limit is $20,500 ($27,000 for those 50 and older). Planning these contributions can significantly impact your next tax return.

4. Consider Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) HSAs and FSAs offer tax advantages for medical expenses. Contributions reduce your taxable income, and withdrawals for qualified medical expenses are tax-free. If you're eligible for an HSA or have access to an FSA through your employer, maximizing contributions can be a smart tax strategy.

5. Review Investment Income Investments can have a significant impact on your taxes. Capital gains, dividends, and interest income all contribute to your taxable income. Reviewing your investment strategy with a tax advisor can help minimize taxes through strategies like tax-loss harvesting or selecting tax-efficient investments.

6. Plan for Tax-Deductible Expenses If you itemize deductions, start planning now for expenses that could reduce your taxable income. This includes charitable donations, certain medical expenses, and potentially deductible interest on student loans or mortgages. Keeping good records throughout the year will make it easier to maximize these deductions next tax season.

7. Stay Informed on Tax Law Changes Tax laws change frequently, and new legislation can impact your tax liability. Stay informed about tax law changes throughout the year to ensure you're taking advantage of any new tax credits or deductions.

8. Consult with a Tax Professional Tax planning can be complex, and everyone's financial situation is unique. Consulting with a tax professional can provide personalized advice and strategies based on your specific circumstances.

While tax season might never become your favorite time of year, using your tax return as a tool for future planning can help make it less stressful. By analyzing this year’s return, adjusting withholdings, and planning for deductible expenses and contributions to retirement accounts, you’re setting the stage for a more manageable and potentially rewarding tax season next year. Remember, the best time to start preparing for next year’s taxes is now.