Time For an Income Tax Review
Unbelievably, it’s almost the end of the year. Before you know it it’ll be Thanksgiving then Christmas, and in a blink it’ll be the new year and the end of the 2022 tax year. That makes now the perfect time to start going over and reviewing your tax information.
It’s always good to review your previous year’s tax return. Take note of any changes that have occurred since the last time you filed. Did you move, retire, switch jobs, or get married? Has your filing status or tax bracket changed? Each filing status comes with different tax bracket income thresholds, standard deductions, and eligibility of certain tax credits.
Tax deductions help to reduce your taxable income, which means you will have a lower tax bill, so you don’t want to miss out on any! However, you need to make sure you have proper paperwork. Having all your required documentation is necessary to claim your deductions and will help protect you if you get audited.
Take some time to find all the deductions you are eligible for, things like retirement contributions, educational expenses, medical bills, property taxes and mortgage interest, or charitable donations. Likewise, you want to be able to utilize any tax credits available to you. As with deductions, you will need to your documents in order to claim them. Planning ahead for the following year, if you don’t already, have a separate file for any paperwork or documentation relating to your taxes, this way you won’t miss any when it comes time to file.
Look back over your medical expenses for the year, they will only be eligible for deductions for the amount that exceeds 7.5% of your adjusted gross income. For example if your AGI is $65,000 and you had $8,000 in medical and/or dental expenses you would be able to deduct $3,125 (7.5% of $65,000 is $4,875. Take $8,000 expenses subtract $4,875 which equals $3,125 eligible for deduction). If you add all your medical expenses and they do not exceed the 7.5% threshold consider moving some dental/doctor visits, medical purchases or procedures to December in order to include them in the current tax year’s existing amount and give yourself that push over the 7.5% line. If you are nowhere near the 7.5% maybe consider the inverse and hold off on scheduling things until the new year, and make plans to maximize those expenses in the following tax year.
You will want to consider if your income will increase or decrease next year because it may change your tax bracket, which would change the percentages relating to your deductions. If you are looking at a significant increase, wait until the next year to take the deduction because it will be worth more as a percentage of the higher income. Likewise, if you will be making less money next year, you may want to accelerate purchases for the current year.
The end of the year is a great time to review your retirement plan. You may be eligible to deduct certain contributions to a traditional IRA. Pay attention to your annual contribution limits for accounts such as your 401(k) or 403(b).
As we round the corner into the next tax year make plans now so you can maximize your deductions and credits. You don’t want to leave yourself scrambling come April, you also don’t want to miss out on money you could be saving. As boring or redundant as it may seem, the best advice is always to plan ahead.