Are You Thinking About Your Federal Tax Return Yet?
There are some things you can afford to think about just once a year. Your routine physical. Your car inspection. Lease renewals. What to buy your spouse for their birthday. Where you put the holiday decorations. For some people, their federal tax returns fall into this category too. Sometime in early spring, they pick a day and that’s when they think about taxes. When they’re done filing, taxes are done for another year. There’s not necessarily anything wrong with this strategy, if your primary tax goal is just to get it done. But if your goal is to grow your wealth and keep your tax bill as low as possible? By the time you’re up against that April filing deadline, it’s too late to do much creative strategizing.
Of course, things are a little different in 2020. The COVID-19 crisis has given most Americans an extra three months to complete and file their federal tax returns, with a new deadline of July 15, 2020. Still, if this year proves anything, it’s that nothing—not even a global pandemic—will prevent the IRS from collecting taxes. At least you can make sure you’re ready for them next year.
Why Year-Round Planning Matters
Will you experience negative consequences of waiting until spring to think about your federal tax return? It really depends. Your financial goals, current financial picture and personal tax obligations are unique to you. Year-round tax planning is about putting yourself in the best possible position to meet those goals, and avoiding costly pitfalls at tax time.
Reasons to review your tax plans routinely include:
• Tax law changes often. Considering how often new tax law is implemented, it’s possible that recent changes have been made to the tax code that will affect how you complete your federal tax return. New tax considerations come up every year. Few people outside of financial planners and tax professionals are up-to-date with all these changes, so they can be surprising at tax prep time.
• Unexpected life events can interfere at tax time. Maybe you have always waited until March or early April to meet with your financial planner and prepare your return, and that strategy has always worked just fine. What happens if you’re in a serious accident next March, or you have to become the caretaker of a family member who is terminally ill? Any number of unanticipated conflicts could derail your tax preparation plans. Making sure everything is on track earlier in the year can make the tax filing process quicker and less intensive when the time comes.
• Your financial planner might have new ideas. If you only talk about taxes with your financial planner once a year, you could miss out on learning about tax strategies that would benefit you. Your financial advisor may know of deductions and tax credits that will change your tax liability next year, or identify other opportunities to let you keep more of your money. But, most of these changes need to be implemented during the year;on December 31st, your tax planning opportunities turn into a pumpkin.
• Starting early lets you figure out what to expect. Surprises around tax time are rarely pleasant. Year-round planning lets you take control of what you owe come April and can help you ensure that you have the cash on hand when your payment is due. That’s especially important if tax time causes you a lot of stress and anxiety. Life is stressful enough; tax time shouldn’t be.
Tasks for Year-Round Federal Tax Return Planning
Again, your financial picture is unique to you, so it’s between you and your financial advisor to create a year-round tax planning strategy. But some of the tasks you might do routinely include:
• Project your earnings. If your income isn’t steady from month to month, like if you’re self-employed, fluctuations in what you earn will affect what you owe. It could be useful to review your earnings at the end of each month, or at least every two months. This allows you to maintain an accurate projection of what you’ll earn this year, avoiding any costly surprises when it’s time to file your federal tax return. Regularly reviewing your earnings is especially important in two-income families, where fluctuations in either person’s income can change the family’s tax liability.
• Review your withholdings and deductions. Knowing what you’ll probably earn this year lets you make informed decisions around adjusting your withholding and deductions. Maybe it makes the most sense for you to itemize deductions this year, and making a well-timed charitable deduction will help you lower your next tax bill. Accelerating your deductions takes advance planning, so this can’t wait until it’s time to file your federal tax return.
• Think about next year’s goals. Will you be starting to pay college tuition next year? Are you planning to start a long-overdue renovation next spring? Will a large tax bill interfere with your ability to afford those expenses? Your financial planner can help you think through all the tax implications around your goals for next year, and make recommendations for how to prepare for them.Federal taxes are inevitable, and there’s no good reason to wait until spring to plan for them. The advisors at Sachetta Callahan can help you visualize the year ahead and calibrate your tax strategy accordingly. Contact Sachetta Callahan to learn more about planning ahead for your federal tax return.