What is the benefit of tax planning?
Tax planning, or taking advantage of deductions, credits, or other tax strategies for which you qualify to reduce your tax burden, has plenty of benefits — especially for those who may be facing a large tax bill.
Every dollar saved is a dollar back in your pocket, and it isn’t just about decreasing your liability; good tax planning can also help you avoid costly penalties and interest charges by ensuring that you file your taxes correctly and on time. Moreover, a little planning now can help you save time later and reduce unnecessary stress by prompting you to get your paperwork and information in order sooner than you otherwise might.
One caveat as we dive deeper into this topic: this post is intended as a guide to help your thinking and not direct advice. Every tax situation is different, and yours is no exception! If you would like personalized help preparing for the 2022 tax season, please reach out — we can help you sort out the details and plan for the year ahead.
What is the benefit of tax planning?
Tax planning, or taking advantage of deductions, credits, or other tax strategies for which you qualify to reduce your tax burden, has plenty of benefits — especially for those who may be facing a large tax bill.
Every dollar saved is a dollar back in your pocket, and it isn’t just about decreasing your liability; good tax planning can also help you avoid costly penalties and interest charges by ensuring that you file your taxes correctly and on time. Moreover, a little planning now can help you save time later and reduce unnecessary stress by prompting you to get your paperwork and information in order sooner than you otherwise might.
One caveat as we dive deeper into this topic: this post is intended as a guide to help your thinking and not direct advice. Every tax situation is different, and yours is no exception! If you would like personalized help preparing for the 2022 tax season, please reach out — we can help you sort out the details and plan for the year ahead.
What’s changing for 2022 taxes?
This tax season, as in recent years, the IRS continues to face challenges related to the pandemic. Nevertheless, there are some crucial steps taxpayers can take to avoid tax return and refund processing delays. For example, filing electronically with direct deposit and avoiding a paper tax return is more important than ever this season. Additionally, the IRS has urged taxpayers to pay extra attention to ensuring all the information they report is correct.
An accurate tax return is especially important for people who received advance Child Tax Credit payments or Economic Impact stimulus payments through the American Rescue Plan in 2021; they will need the amounts of these payments when preparing their tax return. If this applies to you, keep an eye out for a special letter from the IRS containing the amount of the payments you received (you can also check the amounts yourself on IRS.gov).
With temporary pandemic tax benefits like the expansions to the child tax credit and the child and dependent care credit, as well as the federal stimulus payments, all having expired in 2021, your tax liability may revert to pre-pandemic levels — meaning your refund may be smaller this time around.
Moreover, 2022 also brought new regulations on third-party payment apps like Venmo, Zelle, CashApp, Paypal, etc. This could impact payments to freelancers, which will now be reported to the IRS by the apps.
Other significant changes over the past year could further impact your tax situation. For example, the standard deduction for 2022 has increased — for single tax filers, the new deduction for the 2022 tax year is $12,950, while those married filing jointly may claim $25,900 ($400 and $800 increases, respectively). It is usual for this deduction to rise slightly each year, tracking with the inflation rate. For the same reason, income tax brackets are also higher this year. This change is also slight. However, if you were previously at the bottom of a higher tax bracket, you may be bumped down to a lower bracket for 2022.
If you received student loan forgiveness through an initiative such as the Public Service Loan Forgiveness Program, you likely will not owe federal taxes on the canceled amount. However, you may owe state taxes on the forgiven amount if you live in Indiana, Minnesota, Mississippi, North Carolina, or several other states who may choose to tax student loan debt relief.
Finally, if you purchased or sold any crypto or NFTs in 2022, the IRS wants to know about it. This is connected to the IRS’ effort to crack down on unreported crypto gains, which are subject to capital gains taxes. This can become very complex, so if you have had a lot of crypto or NFT transactions throughout the past year, it’s probably a good idea for you to talk to a tax professional about how to approach reporting these transactions on your returns.
If your tax returns are straightforward and you can handle them without professional assistance, there are plenty of resources available, such as tax software and online services. Be sure to research your options and find the best resource for your needs.
2022 changes aside, there are reliable ways to lower your tax burden and stress levels at tax time, no matter what year it is. To discover more, let’s explore some…
Year-end tax planning tips for 2022
To get ahead of the game this tax season, you should always:
- Gather all the necessary documents and information to file your taxes, such as your W-2s, 1099s, and other income statements.
- Start planning early, so you have plenty of time to review your situation and make any necessary changes.
- Reduce your tax liability by taking advantage of any deductions, credits, or other strategies for which you are eligible.
This year, there are also additional year-end tax planning strategies you can utilize before December 31st. These include maximizing your qualified retirement plan contributions, maximizing gains and losses from your taxable investments, and making year-end charitable contributions.
After December 31, 2022, you may still be able to contribute to your traditional IRA and/or your health savings account (HSA).
How can I get a bigger tax refund?
As mentioned above, the best ways to maximize your refund are to maximize your deductions and ensure your filing is accurate. There are also other options you should consider, depending on your circumstances. Remember, no two tax situations are identical, and this article is not meant to constitute specific advice.
That said, you could consider rethinking your filing status to ensure you use the most beneficial option. For example, if you are married, you may be able to choose between married filing jointly or married filing separately statuses, each of which may have different benefits or drawbacks (again, depending on your circumstances).
Furthermore, in boosting your tax refund, as in many other areas of life, sometimes timing is everything. Ask yourself if there are payments or contributions you can make before the end of the year which may reduce your taxable income.
Similarly, as we discussed in last week’s blog post, employees who have accepted stock options as part of their compensation model may also save some money by exercising their options before the end of the year. In this case, however, it all depends on various factors.
Finally, whether you want to find any hidden way to boost your refund or simply need some help sorting through your tax situation, consulting a tax professional is the surest way to take advantage of all of the available tax-saving opportunities.
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