This is an excerpt from Dollar Scholar, the Money newsletter where editor Julia Glum teaches you the modern money lessons you MUST know. Don’t miss the next issue! Register on money.com/subscribe and join our community of over 160,000 scholars.
I’m a Floridian, so it’s probably no surprise that I dislike winter.
I know New York winters are mild compared to the feet of snow my friends in Chicago and Boston regularly receive. But that doesn’t make me feel better. (Thanks, SAD.) I hate that it gets dark early. I hate having my nose run constantly and I hate trudging through puddles of gray snow.
I spend most of the winter looking forward to its end, when the sun doesn’t set early and I can leave my apartment without the albatross that is my down jacket. I dream of sitting in the sun in Prospect Park or drinking a weather-appropriate frozen margarita on the patio of a bar.
“Warmer days are coming,” I tell myself, like a mantra. “April will be here before you know it.”
This is true on many levels, not the least of which is financial. Tax day is only a few weeks away. Even if I’m not ready to drop off just yet, there are things I can start doing now – while I’m stuck inside avoiding sub-zero temperatures – to prepare.
What should I do to prepare to file my taxes?
I called on two experts, Peter Blatt, the president of the Asset Management Center, and Mark Steber, tax manager at Jackson Hewitt, for helping me create a checklist. Here is what they said.
Gather my papers
The IRS sent millions of letters to taxpayers who received the third stimulus check and child tax credit advance payments. The notes, officially called letters 6475 and 6419, contain information about the amount of money I received so I can report it correctly on my taxes. The key is not to throw them away: the tax authorities in particular noted in a press release that “those who receive these letters should keep them.”
My employer should have issued me a W-2 form in January; if I’m unemployed, I should have a 1099-G. Entities like brokerage firms and banks that have paid me interest will also send 1099s, although these often go out in February and March. Blatt says that when working on client taxes, “the #1 thing I find is that a lot of people miss the 1099s – if you have five accounts, make sure you have five 1099s.”
I should carefully review all of these documents to make sure there are no errors, because these are “documents that have very significant consequences,” Steber adds.
“Organize your documents,” he adds. “The shoebox works, the envelope works, if you want to have five folders for income, deductions, credits, life changes and the like – that’s fine too.”
Hide money in an Individual Retirement Account
I am generally eligible to fund a traditional and/or Roth IRA as long as I have earned income and do not exceed the $6,000 limit ($7,000 for people age 50 and over). I can usually deduct what I contribute.
Making a last-minute IRA contribution is “a tried and true tax tip that can help people get a bigger refund and lower their taxes — and it works until tax day,” Steber says. The IRA 2021 deadline is April 15, 2022.
The deductions are limithowever, for people who make a certain amount of money and keep a 401(k), so I’ll have to be careful if that’s a route I plan to go down.
Think about the changes in my life (and the credits that come with them)
Speaking of mindfulness, Steber says it’s a great time to pick up a pace and reflect on all the major lifestyle changes I’ve made in 2021.
Did I get married? Did I have a baby? Did I take in a child? Did I start a business? Did I pay for college? Have I spent a lot on medical expenses? Did I buy a house? The list is lengthened increasingly.
These are important questions to ask me, as they could affect the credits to which I am entitled. I may want to be especially careful with the third stimulus check – if my economic impact payment wasn’t the right amount, I’ll have to claim the recovery rebate credit on my tax return. If I received child tax credit advance payments, I will need to apply to receive the remaining funds.
Blatt says I should also ask myself if I donated to charity last year. If so, I may qualify for a special deduction of $300 above the pandemic line.
Run the Numbers
“Your tax return is your most important annual financial transaction for all Americans,” Steber says. So why wait until April to find out what I owe (or am owed)?
Steber says it’s never a bad idea to do a tax projection. He recommends running the numbers in July and December of each year, but it works now too: “Scribble it down on a piece of paper. Expecting $5,000? Do you owe $5,000? This can motivate you to file sooner if you see something that’s not what you expect. »
I can jump-start my tax preparation process by finding my 2020 return, which I will almost certainly need to file this spring, whether I do it myself online or pay a professional.
The bottom line
To prepare now to file my taxes, I should get organized, contribute to an IRA, consider changes in my life, and do some precautionary calculations.
In all of this, precision is paramount. Steber says the IRS has become sophisticated with its data matching, algorithms and reconciliation. If I make a mistake on my taxes, the agency will likely route my return to an error resolution path – which could mean my refund will be seriously delayed, given the current backlog at the IRS.
But I don’t want to wait too long: the deadline for most taxpayers is April 18, so it’s time to get ready and get moving.
More money :
Can you file taxes for free with TurboTax? It’s particularly complicated this year
Getting your tax refund may take a lot longer than usual
Is there a “best” time to file your taxes?