What to Do After You File Your Tax Return

Whew! You or your tax preparer just pressed “send” and your tax return is off through the ether to the IRS. “I’m done with taxes for another year,” you say to yourself. Not so fast! Tax-planning is a year-round proposition and there is a lot you can do to be prepared for next year.

Below are nine steps to take after filing your tax return:

Learn From Your Return- It is smart to look beyond the amount of tax that you owed. Review your effective tax rate (the percentage of your income paid in taxes, calculated by dividing your tax paid by your taxable income), biggest deductions and credits, and largest income sources.

Ask Yourself Some Questions- Document “lessons learned” during this tax season to inform tax planning for next year. Write down: what surprised you (e.g., blind spots that you hadn’t considered), what was stressful, and what worked well to turn this year’s tax filing into a feedback loop.

Make a List of Carryovers- These are tax write-offs that you can use on future tax returns. Keep a running list and write them down so they don’t get forgotten next year. Think capital loss carryforwards and charitable donation carryovers.

Adjust Payroll Tax Withholding- This also goes for quarterly estimated tax payments and withholding for pensions and Social Security. If you owed a lot on your 2025 tax return, received a large refund, or expect big changes to your income in 2026, tweak your withholding now.

Review Itemized Deduction Potential- Itemizing deductions is generally not possible without proactive tax planning because the standard deduction is a very high hurdle to exceed. Consider bunching charitable donations, state and local taxes, and medical expenses to be able to itemize.

Consider Lifestyle Changes- Life events that can change the amount of future tax owed include marriage, divorce, widowhood, job changes, retirement, and relocation. These events should prompt proactive planning and not big surprises.

Update Your Record-Keeping Systems- Set up a system to organize documents related to 2026 income taxes if you had messy records before. This includes business mileage logs and receipts and documentation for tax write-offs (e.g., child and dependent care tax credit).

Schedule a Mid-Year Tax Check-Up- By July or August, you will have more clarity about your expected income and expenses than you do in February. Use this information to prepare a pro forma (projected) tax return so you can adjust tax planning strategies before it is too late.

Evaluate Capital Gains Exposure- Study your 1040 Form and consider where most of your tax bill came from. If capital gains are triggering a lot of tax, consider whether you have high turnover investments and concentrated positions. Try to purchase tax-efficient investments instead.

Bottom Line: A tax return provides a lens into your overall financial situation. Study it for insights that may lower your tax bill in the future. If you are working with a financial advisor, share it as an informational tool. Be proactive and don’t put taxes on the back burner until next year. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Looking Ahead to Your 2024 Tax Return

 

With the 2023 tax filing deadline in the rear view mirror, now is a good time to look ahead to 2024 taxes that you will owe in April 2025. 

In a recent article for the Rutgers Cooperative Extension newsletter, VISIONS, I described key features of your tax return to review for future financial planning including income sources, tax write-offs, changes in tax filing status, tax rates and marginal tax brackets, tax withholding, retirement plan contributions, and capital gains and losses.

This post extends that discussion with a description of seven key steps to take to plan for your 2024 tax return due in 2025.

 

Estimate Your 2024 Income- Project your income from all sources, including wages/salary, investments, rental income, business income, etc. Consider any expected changes such as salary increases, job changes, side hustles, or expected increases or decreases in income.

 

Review Your Tax Withholding- Make sure your tax withholding aligns with estimated 2024 income. Adjust your withholding (and/or estimated quarterly payments), if necessary, to avoid an under-withholding tax penalty. The IRS withholding estimator can help make this calculations.

 

Organize Receipts and Records- Start organizing receipts and documents related to investment transactions, required minimum distribution (RMD) withdrawals, tax credits, and more. Good record-keeping throughout the year will make it easier to prepare your 2024 tax return.

 

Maximize Retirement Plan Contributions-Contribute as much as you can afford, up to the maximum allowable amount, to tax-advantaged retirement accounts (e.g., 401(k) plan). Not only does this help you save for retirement, but it can also reduce your taxable income for the year.

 

Consider Tax-Efficient Investments- Consider strategies to minimize taxes. For example, you can hold investments for a year and a day or longer to qualify for lower long-term capital gains tax rates or consider tax-free investment vehicles such as Roth accounts and municipal bonds.

 

Do Strategic Tax Planning- Explore tax planning strategies that may apply to your situation, such as bunching deductions, contributing to a Health Savings Account (HSA), Roth IRA conversions, or utilizing tax-loss harvesting to offset capital gains.

 

Consult a Tax Professional- Consider consulting with a tax professional or financial advisor for personalized guidance and advice. If you have complex financial situations or anticipate significant changes in your tax situation for 2024.

 

Finally, it is not too early to begin thinking about income taxes in 2026, when the Tax Cuts and Jobs Act (TCJA) is set to expire. If Congress does not extend the TCJA or pass a new tax law before January 1, 2026, 2017 tax rules will apply, indexed for inflation. 

As a result, there will be an increase in tax rates (e.g., 12% rate becomes 15%), standard deductions will halve, the child tax credit will revert to $1,000, and the $10,000 limit on itemizing state and local taxes (SALT) will end. Readjusting to old tax rules and tax rates and making sure that tax withholding is correct will take some advance planning.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Year-End Tax Moves to Save Money

 As the year winds down so, too, does your opportunity to take proactive steps to reduce 2023 income tax due in April 2024 and, perhaps, taxes due in future years as well.  Below are some money-saving tax planning strategies to consider. Seek professional advice as needed.

Early RMD Withdrawals- The “financial gap years” between age 59½ and 73 (or 75 if born in 1960 or later) are when there are no longer penalties for withdrawals from tax-deferred accounts but required minimum distributions are not yet mandatory. Sometimes it makes sense to pay taxes voluntarily at a lower tax rate during gap years to save on taxes later at a higher tax rate.

 

Draft Tax Return- A draft tax return with “best estimates” of taxable income and tax write-offs is the first step in a year-end tax review. By early December 2023, income and tax withholding should be pretty predictable and tax-saving strategies taken so far (e.g., tax-deferred retirement plan contributions and charitable gifting) are already accounted for.

 

Year-to-Year Comparison- Once a draft 2023 tax return is prepared, compare it to 2022. Look for big changes in income and expenses that will affect taxes owed. Example: savers earned about 0.25% interest in 2022 vs. 4.5%+ with online banks and money market funds in 2023. On large account balances, this could result in a big difference of thousands of dollars of additional taxable income (e.g., $250,000 x .0025 = $625 versus $250,000 x .045 = $11,250).

 

Tax-Loss Harvesting- This is where investors proactively take a loss on the sale of securities to offset realized capital gains. If losses exceed gains, up to $3,000 can be claimed against other taxable income and any losses beyond that carried forward to future tax years. Securities held for a year and a day or longer are taxed at long-term capital gains rates (versus ordinary income rates for short-term gains) so it is important to review their holding period before selling.

 

Tax Bracket Planning- The objective is to control your marginal tax bracket to avoid paying taxes at a higher rate. For example, if you are near the top of the income range for the 12% tax bracket, you want to try to avoid slipping into the 22% tax bracket, which is a big jump. Knowing where you stand can inform tax-reducing strategies such as Roth IRA conversions, deferring income from 2023 to 2024, increasing retirement plan contributions, and “bunching” itemized deductions such as charitable contributions and property taxes due in early 2024.

 

Fourth Quarter Estimate- The last opportunity to apply tax payments toward expected 2023 tax liability and avoid an under-withholding penalty is a fourth quarter estimated tax payment due January 16, 2024. By early January, all information for a tax return should be known, including mutual fund dividend/capital gain distributions that are passed through to investors.

 

For additional year-end tax-saving strategies, consult with a tax advisor or financial planner and/or review this publication from Intuit.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Ten Tips for Tax Withholding on Multiple Income Streams

It is not uncommon for American taxpayers of all ages to have multiple streams of income. Young adults working in the gig economy may have income from a variety of consulting contracts or from a full-time job and “side hustles.”

 

Many older adults also have multiple income sources including Social Security, a pension, full-or part-time work or self-employment, withdrawals from retirement savings (including taxable required minimum distributions or RMDs), and interest, dividends, and capital gains on investments. Roth IRA conversions also produce taxable income at any age.

 

A big concern of people with multiple income streams is adequate tax withholding. Nobody want to pay the IRS tax underpayment penalty, which is 0.5% of the amount owed for each month or partial month of unpaid taxes.

Below are ten tax withholding tips for taxpayers with multiple streams of income:

 

Inventory Your Total Income- Make a list of projected income sources for the current year, using previous income listed on your 2021 tax return as a guide. Adjust the previous income as life circumstances necessitate (e.g., the start of RMDs, receipt of an inheritance, or increased or decreased earnings).

 

Do a Mid-Year Income Tax Mock-Up- Once you have inventoried your income, take the time in June or July to do a 2022 pro forma tax return using best estimates for tax credits, unknown income (e.g., mutual fund dividend and capital gain distributions), and tax withholding. Use the IRS Tax Withholding Estimator to check if withholding is adequate.

 

Arrange Tax Withholding Services- Employers withhold income taxes based on information that workers submit on Form W-4. Self-employed workers generally submit quarterly estimated tax payments or over-withhold taxes at their “day job.” In other instances (e.g., RMDs, Roth conversions, pensions, unemployment benefits), taxpayers may have to proactively request tax withholding. For withholding on Social Security benefits, taxpayers must complete Form W-4V.

 

Make Estimated Tax Payments- Quarterly estimated payments are often used for withholding on investment dividends and capital gains, freelance income as an independent contractor, and other taxable income where withholding was not requested. To mail quarterly payment vouchers with a check to the IRS, taxpayers need to download Form 1040-ES.

 

Fine Tune Withholding by January 15- The fourth- and final- estimated tax payment for a tax year is due by January 15 of the following year. By early January, most data that affects taxes is a “done deal” including tax withholding, freelance income, and mutual fund distributions. Update your mid-year tax mock-up and adjust the Q4 estimated tax accordingly.

 

Consider Safe Harbor Rule #1- Especially if you expect your total income to increase this year from one or more sources, withhold/estimate at least 100% (i.e., the same amount) of tax owed the previous year (110% with adjusted gross income or AGI over $150,000) by the Q4 estimated payment. This way, the IRS will not assess an underpayment penalty.

 

Consider Safe Harbor Rule #2- If you expect your total income to decrease from a “high water mark” a year earlier, the safe harbor rule, above, would result in over-withholding. A second safe harbor is to pay at least 90% of tax liability for the current year. There is also a third safe harbor for taxpayers who owe less than $1,000 after subtracting withholding.

 

Don’t Forget Self-Employment Tax- Self-employed taxpayers (including freelancers), not only have to withhold enough tax on their taxable income, but they also need to add self-employment tax to their tax bill as an “other tax” using the 1040-SE tax form and Schedule 2. The higher the net income of a taxpayer’s business, the higher the tax bite, which needs to be anticipated with withholding somewhere or quarterly estimated tax payments.

 

Consider “Bunching” and Withhold Accordingly- With another half-year to go, there is still plenty of time to develop a proactive strategy to exceed the standard deduction. Typically, this is done by combining one or more of the following: large qualified, unreimbursed medical expenses, state and local taxes up to the $10,000 SALT cap, mortgage interest, and sizable charitable donations. If you plan to “bunch,” check your withholding with the IRS calculator noted above.

 

Expect the Unexpected-  If you have invested large sums of money (at any age) or have watched investments grow over time, taxable capital gains (e.g., from mutual funds) will grow as well. Be sure to include reasonable estimates of this source of taxable income in calculations for tax withholding.

 

For additional information, review the IRS publication Tax Withholding for Individuals.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.