Tax season is here again. It happens every spring and it is typically met with varying degrees of mixed emotions. While paying taxes isn’t optional, we do have choices and actions available to change the outcome on our tax forms each year. This year, in response to the Coronavirus public health emergency, the federal tax filing date has been pushed to July 15th. While this extension may provide some the chance to procrastinate a bit longer, it is also provides a unique opportunity to elevate your understanding of your overall financial health.
Here are a couple of tips to take advantage of this tax season:
- Ask Questions – First and foremost, it is important to establish a foundation to understand your tax situation and how it is influenced. For example, knowing the difference between a deduction and a credit, and how do each of those impact your tax liability or refund amount. To CPAs and tax preparers, these concepts and terms may feel like common knowledge, but to most of us it sounds more like a foreign language. Asking questions and learning more about your tax and financial position will help both you and your tax preparer uncover potential opportunities for saving. Just as it is important to ask your doctor questions and have a complete understanding of your physical health, it is also vitally important have a complete understanding about your financial health.
- Look at the Big Picture – In order to prepare your tax returns, you will likely receive a number of tax-related forms from your employer and any financial institution where you may hold investments or secured loan accounts. This is a great opportunity, not only to review those documents, but also to take the time to do a full financial review. In my house, this includes, but is not limited to: review of retirement accounts and investments, running a full credit report (available free annually through each of the three credit reporting bureaus), and reviewing the household budget for the year.
- Take Action – If your tax bill is higher than you were expecting for the prior year, there may be actions you can still take to change it prior to filing, depending on your personal situation. Inquire with your tax advisor if additional contributions to a Health Savings Account (HSA) or Individual Retirement Account (IRA) may work for you. As a business owner, implementing a SEP-IRA plan may also be an option. All these potential solutions are subject to contribution limits and other considerations, so consulting with a tax advisor is important. As you get a better understanding of your current tax situation, now is the time to seek financial and tax planning advice to make changes to match your goals for coming year and beyond.
- Connect with a Professional – Whether a CPA or other trusted financial advisor, it is important to have someone in your corner who understands tax rules and implications. Your trusted advisor should be able to review your current portfolio, discuss your financial goals, and help you find ways to succeed. When engaging with a tax preparer or financial advisor, ask them what their services include. Be honest about your expectations of them and what your goals are in seeking their help. This is where online tax preparation services fall short. While an online form may be able to help you correctly calculate and file your taxes based on set values, it is not able to collaborate with you to find opportunities to help meet your financial goals.
To me, tax season is more than just filing the return. It’s a time to take stock of the past year, evaluate my current financial standings, check in on my long-term financial goals, and set new goals and actions for the future. Since you’ve been given more time this year, dig deeper, elevate your understanding and set yourself up for better tax years ahead.