Too Late for 2022 Tax Planning? Guess again.
2022 is done, so 2022 tax planning is done too, right? Guess again. Although it’s true that most tax planning strategies are limited after December 31st, there is still a lot you can do to make the tax-filing season cheaper and easier.
Maximize Your Retirement Contributions
If you haven’t already funded your retirement account for 2022, you still have time. Contributions to a Traditional IRA (whether deductible or not) and to a Roth IRA are available until April 15th, 2023. If you are self-employed and have a Keogh or SEP-IRA, you have until October 15th, 2023 if you submit an extension of time to file your tax return. Not only will making a deductible contribution lower your tax bill, but your investment will compound tax deferred. There are specific requirements and limits for each type of account so check with a qualified tax advisor on your specific situation.
Estimated Tax Payments
If you don’t pay enough to the IRS during the year, you may be looking at a hefty tax bill come April. It is possible that you might even owe penalties and interest on top of the tax. You could avoid any 2022 fourth quarter penalties on underpayment of tax if you submit a payment by January 15th 2023. Try not to overpay the tax however, because the IRS does not pay you any interest on the borrowed money called your refund. It is your money so plan accordingly.
Organization of Your Records
Having your records organized may not save tax dollars but will make your tax season less stressful. Start by keeping your prior year returns and tax documents in the same place. Collect all of your receipts and documents that may have piled up during the year (hopefully you already have a folder or file called “Taxes” to get you started). When your W2s, 1099s or other tax documents start arriving in the mail, put them all in the same folder and group them together in like categories. When beginning to prepare your return, work off a checklist or worksheet so you don’t overlook anything.
Take Every Deduction You Are Entitled To
Oftentimes, taxpayers overlook deductions or decide not to take certain deductions because they feel too, they are being too aggressive. In order to minimize the amount of tax liability, take every deduction you are entitled to. If your qualified itemized deductions exceed your standard deduction, file with the higher amount. Some well-known items that you can itemize are home mortgage interest, real estate taxes and charitable deductions. Another lesser-known itemized deduction that you may be entitled to include is out of pocket medical expenses. If you are self-employed, make sure you write off all of your expenses and be prepared to back these with receipts. One of the items self-employed individuals may be eligible for is the Office-In-Home Deduction. If you conduct business exclusively out of your home office, you may be eligible.
File & Pay On-Time
If you can’t finish your return on time, make sure you file Form 4868 by April 15th, 2023. You will get automatic six-month extension of the filing deadline until October 15th, 2023. On the form, you need to make a reasonable estimate of your tax liability for 2022 and pay any balance due with your request. Requesting an extension in a timely manner is especially important if you end up owing tax to the IRS. If you file and pay late, the IRS can slap you with a late-filing penalty of 4.5 percent per month of the tax owed and a late-payment penalty of 0.5 percent a month of the tax due. The maximum late filing penalty is 22.5 percent, and the penalty tops out at 25 percent. By filing Form 4868, you stop the clock running on the costly late-filing penalty.
That doesn’t mean you have to wait until April 15 to visit your tax preparer’s office, though.
In fact, the earlier you can prepare and file your tax returns, the better off you are. First, a new tax law effective last year requires the IRS to hold refunds for a few weeks for some early filers who claim the Earned Income Tax Credit and the Additional Child Tax Credit. The IRS has to hold the entire refund, not just the portion associated with those credits, until at least February 15. Second, the rise in identity theft is causing the IRS and state tax authorities to spend additional review time to protect against fraud. Additional safeguards will be set in place for the upcoming 2023 filing season. Knowing these two important things, you should get a head start on the process. Even though the refund may be delayed, you should still file early to get ahead of the possible identity theft.
Seek Help, If You Need It
Low cost, affordable options to prepare and file your returns exist. If you are comfortable doing your own return, go for it. If you become uncomfortable or get in a jam, call a professional for added confidence and peace of mind.
Jeffrey Schweitzer can be found at Northeast Financial Strategies Inc (NFS) at Wampum Corner in Wrentham. NFS works with individuals and small businesses providing financial and estate planning, insurance, investments and also offers full-service accounting, bookkeeping, payroll, income tax preparation, and notary public services. For more information, stop by the office, call Jeffrey at 800-560-4NFS or visit online - www.nfsnet.com
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