There are few things more annoying in the world of personal finance than a surprisingly high tax bill. Because our tax system does not require most people to file and pay taxes until April the following year, it is easy to miss that the tax bill you are paying or the refund you are receiving is based on the actions that occurred prior to December 31st. In fact, you may not file your extended return until October if you have a complex tax situation. While these dates make it more convenient to file taxes in an orderly manner, it is important to know that you need to start your tax planning in the actual year you are filing for if you want to get the most out of it.
Review your last tax return.
If you got a surprise tax bill or if you feel like you should have received more deductions on your previous return, don’t just stew about the tax system. Find out why. Review that return against previous returns to see what may have changed.
Were there deductions in previous years that you are unable to claim today? Check your W-2 against previous years and see if your withholding went down, which would increase your chance that you did not withhold enough. Have you had dependents progress to being independents? Are you paying significantly less interest on your home, which would lower your mortgage interest deduction?
Your situation may not have changed much, but the tax law could have changed. There was a significant tax bill in 2018, the Secure Act in 2019, and a myriad of temporary changes in 2020 due to the pandemic. Examine if these changes have helped or hurt your tax situation.
Calculate how you are projected to end the year.
Now that you have a good grasp on the past, run a quick estimate of what your tax situation will look like by the end of the year. For most people, the only thing you will need is your most recent pay stub. Use a free tax estimator and make some projections about where your year end numbers will be.
Review your opportunities and take advantage.
There are several really good lists of tax deductions and end-of-year tax strategies like this one and this one. While you are perusing these lists, think about which of these strategies may best fit your situation and map out a plan to execute. For instance, if you are considering a charitable deduction, now is the time to estimate your total Schedule A deductions and compare them with the standard deduction. If you are not close to surpassing that standard deduction, consider making that gift on Jan 1 to give you a better chance of itemizing next year.
Talk to a tax professional in the “off-season.”
If you are working with a tax preparer, schedule a follow-up appointment after they complete your taxes to make sure you are doing everything you can to manage your taxes better. If you are working with a tax professional and you only talk during the rush of tax preparation season, you are likely not getting their undivided attention. Even very professional well-paid tax accountants can get overwhelmed with the rush to get returns done in the spring. Late summer and fall are often better times to have an in-depth discussion regarding tax planning, and it gives you time to implement their recommendations to make a difference before the end of the year. If you are debating hiring or changing a tax professional, this is also the time of year to have them review your previous returns and offer suggestions of how they could have saved you money in previous years.
In addition, your employer may offer a free workplace financial wellness benefit that can help you get started with this process. Just make sure they are unbiased. Whether you are taking your tax planning in your own hands or working with a tax professional, it is not too late make a significant impact on your 2021 taxes.