While you may be relieved the 2018 tax season is over, now is actually a good time to start thinking ahead to 2019.
By spending a few hours throughout the year on tax prep, you may avoid the unpleasant surprise of a large tax bill; ensure you don’t forget possibly beneficial deductions; and prevent tax season heartache. And one small purchase could make your life easier.
Here are three ways to avoid a last-minute scramble next year:
One of the simplest things you can do to make tax preparation easier is to go buy an accordion folder. (Amazon has them for $5.99.) Use it to collect anything tax-related, including investment statements, receipts of charity donations, IRA contributions, home-related expenses, and medical payments, recommends Bryan Bibbo, a financial advisor and tax preparer at JL Smith Group in Avon, Ohio.
Whether you’re an early-bird filer or a last-minute type, collecting your tax documents in advance will make filing easier. “The biggest thing that delays taxes is not being organized and not having things together,” Bibbo says.
Categorize the folder subsections by broad areas of your life—such as education, work, charities, church, alimony, child care/eldercare, and professional organizations, recommends Daniel Hill, a certified financial planner and president of D.R. Hill Wealth Strategies in Richmond, Virginia. “Keep the file accordion in a visible place within a home office or a den, so it serves as a constant, yet neat and private reminder, to place receipts in the various subsections as they are received,” he says.
The folder method is particularly helpful for tracking expenses related to your home office, if you have one, says Colleen Carcone, director of wealth planning strategies at TIAA. If you plan to take advantage of the home office deduction, you can expense bills such as your electricity, heat, phone, or cable, she adds.
Carcone has a piece of paper in that folder listing her expenses. She spends about 15 minutes each month logging details. “Keeping track of everything in one place saves the headache when you’re sitting down to do your taxes, which already is a stressor for most folks,” she says.
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Many Americans were surprised by the amount they owed in taxes this year, and the reason traces back to the 2017 Tax Cuts and Jobs Act. To prevent an unpleasant surprise again next year, you’ll want to adjust your federal withholdings.
“For so many people, this has been the issue,” Morris Armstrong, an enrolled agent and tax preparer in Cheshire, Connecticut, says by email. “The tax liability has been less, but so has the amount withheld, so people are surprised that they are not getting that much back.”
To make these changes, fill out a new W-4 form with your employer. Change line 6, which allows you to have an additional amount of your choosing withheld from each paycheck. Use the amount in federal taxes you owed for 2018 as your baseline, then divide that amount by the number of pay periods left in the year, Bibbo says.
“You can quickly nip that problem in the bud,” he says.
Aside from withholdings, there are other ways to reduce your tax burden, including making contributions to retirement accounts—either a 401(k) or a self-directed IRA. Now is a good time to plan how much you’ll contribute to these accounts throughout the remainder of the year.
“The retirement savings contributions credit, or saver’s credit, is a favorite of mine to share with people who might qualify,” says Jason Escamilla, chief investment officer of ImpactAdvisor in San Francisco. “It’s a massive tax break for lower income households who opt to save for retirement.”
Here’s an example of how powerful it can be for an eligible taxpayer: If a married couple with less than $38,500 in adjusted gross income contributes $2,000 to a retirement plan this year, they may qualify for a saver’s credit worth 50% of that, cutting their tax bill by $1,000. If their retirement contributions were pretax, they will also pay less in taxes, because their taxable income is lower. And they may get a match on contributions from their employer, Escamilla says.
Finally, while the 2020 tax deadline is nearly a year away, it’s a good idea to schedule your tax-prep days now, recommends Hill. Sit down with a 2020 calendar and block some time now to do your taxes next year. “By having your information ready to go, in an accessible location, and documented pre-set days to work on your taxes,” he says, “your 2020 tax season will take you to the front of the class.”