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With spring just around the corner, tax season is here too. Taxes are due April 18 this year. While you might prefer to put off thinking about your income taxes until the last minute, you’ll be better prepared to maximize your deductions if you lay the groundwork in advance. Financial education is a key aspect of managing your finances well in the day-to-day and making smart long-term strategy decisions. Taxes are one of the most complex and important topics to learn about on the journey to financial independence.
Kinetic Credit Union is here to share a simple roadmap for how to plan for tax season this year. The earlier you can start gathering information, the better prepared you will be when the April 18 filing deadline is here!
Assess Your Financial Situation
Many factors combine to create your overall financial picture. The complexity of your financial situation will make a big difference in how you approach preparing your taxes. Your employment situation and the types of income that you earn throughout the year are the biggest determinants of how much taxes you owe (and how many forms you’ll need to file with the IRS).
Employment and Income
Where does your income come from over the course of a year? If you have a single W-2 job that provides all your income, then you won’t have too much homework to do at tax time. If you have other types of income, such as from rental properties or investments, or you are earning self-employment income, then things can get a bit more complicated.
And income doesn’t just come from your work and assets you own. If you won money or other items of value in a lottery or sweepstakes, that could count as income as well.
Gather Your Financial Information
Whether you plan to file your taxes yourself or get a professional to help you, you’ll need to pull together a lot of information. Starting on this as early as possible is a big help when the tax filing deadline is approaching.
For people who are currently employed, the biggest items will be records of income from work. If you are a traditional employee, you should receive a W-2 from each employer you worked for during the year. If you do freelance or contract work, you should receive a 1099 form stating how much you were paid throughout the year.
There are plenty of other tax forms you might receive in the mail in January in addition to those from your employers or clients. For instance, if you have money in savings or other bank accounts, you should get a form showing how much money you earned from interest on your savings in 2022. You may have forms from investments or your company's health insurance plan. There are a huge number of possible items that you might have, depending on your situation, so it’s important to get educated on your financial situation and seek out financial knowledge from professionals as you plan your taxes.
You’ll also want to gather up records of your expenditures and contributions to charity throughout the past year. If you have a side hustle or are self-employed, verifiable business-related expenses can save you a lot of money. If you have a substantial amount of money for a charity or nonprofit, that could potentially reduce your tax burden as well. Other types of expenses related to education, medical care, and homeownership can factor in as well, so if you are a student or a homeowner or you or your family had substantial medical costs last year, you’ll want to have records of those expenses readily available.
Do Your Research and Take Advantage of Free Resources
While you’re planning to tackle your taxes and maximize your refund (or minimize what you owe Uncle Sam), take advantage of free financial education resources along the way. To help our members better understand their money and control their financial situations, we’ve developed the Smart Steps Financial Education Program. See our “Building Financial Capability” module for the basics on the importance of tax management, and other relevant topics. Are you using or considering a 529 plan? Check out our “Investing in Your Future” resource for information on the tax implications of 529 plans.
Other important tax-related topics covered in our financial education resources include retirement planning and accounts like 401(k)s and IRAs, small business financial literacy, and how to plan to become a financial caregiver for a parent or other relative.
Knowledge is power, particularly when it comes to navigating income taxes! Take advantage of free resources from Kinetic Credit Union and other sources to study up on taxes before your return is due.
Enlist a Professional if You Need Help
Many people choose to prepare their own taxes with the assistance of a software. There are popular paid solutions like TurboTax, and many taxpayers can even file a federal tax return for free through IRS Free File. If your Adjusted Gross Income (AGI) is under $73,000, you are eligible for Free File, which includes some state tax preparation and filing as well.
If your situation is a bit more complex, or you just really don’t want to prepare your own return, you can hire a financial professional. This can add a significant amount to your costs. Different accountants and tax preparers price their services differently, so average costs will vary, but your costs could range from a couple hundred to several hundred dollars or more depending on the complexity of your situation and how well-organized your records are.
If you do choose to hire a financial professional to help with your return, be sure to research them in advance and ideally get referrals from trusted individuals. A dishonest or unskilled tax preparer could cause you significant headaches.
Make a Plan for Paying Your Bill or Using Your Return
It’s not very common for people to pay exactly the amount of taxes they owe to the dollar throughout the year. Just about everyone finds that once they file their return, they either get a refund from the government or owe an additional tax bill. In either case, you want to make a smart plan to make the best of the situation.
If You Owe More Taxes
If you underpaid your taxes last year, you’ll need to make up for that now. Hopefully, you can settle your liabilities when you file your taxes. If you can’t pay everything right away, you absolutely still need to file your return to avoid additional penalties for not filing. Then, you can request an installment plan and pay your back taxes over time.
If You Get a Return
While it’s much more fun to get a tax return than to owe a tax bill, you still should take a moment to do some planning if Uncle Sam owes you rather than the other way around. First, think about what to do with the money. Could you pay down debt, a particularly high-interest debt like a credit card? Or perhaps you could use the cash to open or add to a tax-advantaged retirement account like an IRA.
If you got a very large return, you may want to consider adjusting your withholding next year. After all, that check from the IRS just means that you gave the federal government an interest-free loan by overpaying your taxes last year. If you find yourself getting huge tax returns, in the future you could reduce your income tax withholding, and have that money in an interest-earning savings or investments account throughout the year.
Prioritize Financial Education
After the dust settles on your 2022 taxes, take some time to make notes of what you learned, and areas where you can do better in 2023. Refer to our Smart Steps Financial Education Program resources, and plan for an even better 2023!