It is never too early to start preparing for tax season. Tax returns for 2021 are a reflection of the entirety of 2020, so there is obviously a lot of data to collect. Some tips can also help you maximize your tax refund and deductions to ensure you are getting everything you are entitled to.
Review/Establish Filing Status
The first thing to look at is whether your filing status is different than in past years. In cases of marriage, death, or divorce, you might be changing from a single filing to a joint filing. The main differences are that separate returns may charge a higher tax rate, but the standard deduction is lower than with joint filers. Married couples, for example, benefit by filing jointly because they have a smaller deduction. If you are filing separately but have primary custody, you can file as head of household and list dependents for a more significant tax break.
Organize and Order Deduction Documents
Reflect on last year’s tax preparation process. If there were documents that were hard to obtain or concepts that were difficult to grasp, you could give yourself ample time this year to ensure things go more smoothly. Many online tax services can help navigate the challenging forms of tax time to estimate your refund amount. Some examples include Credit Karma, HR Block, and TurboTax. If you lost out on a refund or a deduction because of poor record-keeping, make sure to keep an eye on it this year. If you’re a small business owner or entrepreneur, this is especially important; receipts are crucial.
Plan and Prepare for Estimated Taxes
There is a direct correlation between the amount of money your employer withholds each pay period and the amount you get refunded at tax time. A withholding tax takes a set amount of money out of each paycheck and gives it to the government as a credit against the employee’s annual income tax due at the end of the year. If too much money is withheld, an employee will have overpaid their taxes and thereby receive a tax refund. If not enough is withheld, an employee will have a tax bill that encompasses the remaining amount. Too much money withheld means a nice refund at year’s end, but it also means you might want an adjustment for a more sustainable lifestyle throughout the year. This is also another important factor for business owners and self-employed individuals to consider, as you may not be paying income taxes on your earnings throughout the year.
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