A Guide to End of Year Tax Preparation
Taxes can be stressful, but if you complete these tax preparation steps ahead of time, you’ll be more prepared come April.
November 9, 2021
Tax season can be stressful — especially if you don't prepare in advance. Fortunately, with a few tax preparation steps completed ahead of time, you’ll be ready to go come April.
As the year draws to a close, what can we do now to prepare for tax filing season? This guide will walk you through tax preparation steps to help save you more money and reduce the stress of filing your taxes.
Gather tax information
Getting organized can help prepare you for a seamless tax-prep season. You’ll want to compile all the necessary information that you can, including:
Tax filing documents and tax forms received
Receipts for eligible deductions/business expenses
Copies of last year’s tax return
Income adjustment records
Records for taxes you’ve paid during the year
If you’re preparing ahead of time, you likely won’t have all the necessary documents (such as your W2 or 1099’s, which are issued in January). However, gather what you can from a tax document checklist to be as prepared as possible.
See this guide from TurboTax for more information on documents.
Maximize retirement contributions
Contributing to a retirement plan, such as a 401(k) or IRA, can help reduce your taxable income and save you money come April — while building your wealth long-term.
Pre-tax retirement plans, like a 401(k) or traditional IRA, directly reduce taxable income. If you contribute $5,000, you’ll be able to reduce your taxable income by $5,000. Use pre-tax retirement contributions to design your income tax plan for 2021.
Like the Roth IRA, post-tax retirement plans don’t reduce your taxable income in the current year. However, they are still worth utilizing, as they allow investments to grow tax-free.
The deadline to contribute to a 401(k) for 2021 is December 31, 2021. The deadline for an IRA is the tax filing deadline (April 15th, 2022, for most filers).
Consider standard vs. itemized deductions
Do you usually take the standard deduction or itemize your deductions? The distinction is important, and it can affect your year-end tax planning.
The standard deduction is now at $12,550 for single filers and $25,100 for married filers. Because of this, most people take the standard deduction. If you take the standard deduction, you won’t need to take any specific steps in 2021 to prepare for your tax filing in April 2022.
The Tax Foundation estimates that only around 13.7% of US taxpayers itemize their deductions. If you’re in this group, it may benefit you to optimize year-end spending to maximize deductions.
If you do itemize deductions, you may wish to:
Make year-end charitable contributions to increase your deductions
Prepay any expenses that are eligible for itemized deduction (if you want to maximize deductions in this tax year)
Delay expenses that are eligible for itemized deduction (if you’re going to shift more deductions to next year)
The strategy here depends on whether you want to maximize current-year deductions or next year’s tax deductions. That decision depends on your tax bracket, as well as what you expect your income to be for next year.
Make charitable contributions
Contributions to qualified charities are generally tax-deductible. However, this usually only benefits you if you itemize deductions.
However, for the tax year 2021, the IRS is allowing a special deduction of up to $300 ($600 for married filing jointly) for charitable contributions. Anyone can take this deduction, even if they don’t itemize.
This means that every taxpayer can deduct up to $300 of charitable contributions made in 2021.
If you’re planning to donate to charity, do so before December 31st, 2021, to take advantage of this deduction. Be sure to save your receipt and donate to an eligible 501(c)(3) nonprofit.
Sell investments that have lost money
If you have investments in taxable accounts (meaning outside of retirement accounts), you may be able to take advantage of a strategy called tax-loss harvesting.
Essentially, this strategy involves selling assets that are at a loss to offset gains from other assets.
Let’s say that in 2020 you invested $1,000 in a tech stock and $1,000 in a healthcare stock. In December 2021, the tech stock is worth $1,400, but the healthcare stock is only worth $800.
In this example, selling both investments would result in a net gain of $200 ($400 gain minus $200 loss), and the taxpayer would only owe income tax on the $200 gain (instead of the full $400 gain if they sold the tech stock).
If your investment losses exceed your investment gains, you can also use losses to offset normal income, up to $3,000 per year.
See this guide from Schwab for more information.
Maximize employer benefits
If you have a job with benefits, you should aim to maximize them each year.
This includes contributing to an employer-sponsored 401(k) or pension — particularly if the employer matches your contributions.
It also means keeping an eye on flexible spending accounts if your employer offers one. If you can utilize a flexible spending account, this can save you a substantial amount on taxes. However, you must use the funds before year-end, or you’ll miss out on the tax benefits.
To explore all the benefits available from your employer, speak with the HR department.
Estimate your refund (or tax owed)
To plan ahead, it can be helpful to estimate your refund or the amount you will owe for the coming year. You won’t file at this point, but it can be helpful for planning purposes.
Plug in rough numbers into your tax software to receive a rough estimate of what your refund or tax liability will be. Alternatively, you could simply use a tax calculator.
Expecting to owe more when you file? Start setting aside some money now.
Expecting a refund? Make a plan for how to maximize your tax refund by spending it wisely.
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When can I do my taxes?
2021 tax returns are due Friday, April 15th, 2022, for most filers. But can you file earlier than that?
Generally, tax returns begin to be accepted by the IRS around late January or early February. The IRS will issue a statement in early January explaining when they will begin to accept returns.
If you use an accountant or tax preparer, you should check with them to see when they begin filing returns. Wondering what to bring to a tax appointment? You should bring everything on this tax document checklist that applies to you.
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