Preparing your 2023 tax return can be a lot easier than you think. With a heads-up on some smart planning tips, you can avoid many of those tax-time headaches.
With tax season now underway, it’s a great time to open the lines of communication with your CPA – and earlier is always better. By keeping them in the loop of your tax particulars, they can better advise you on effective strategies to optimize your tax savings. To help you plan and prepare for your best 2023 tax return outcome, we have put together 10 tax-savvy tips to save you time and stress.
1. Highlight any major life events, financial and personal.
Has there been any notable change in your investment portfolio or have you reached a personal life milestone? Ideally you should share these events with your CPA before they occur, or as soon as possible afterwards. This will enable better collaboration on strategies to reduce your tax burden, plus allow time for any necessary forms to be completed. Here are some examples of life events that can impact on your tax position:
- New investments
- Investment portfolio changes
- Birth of a child
- Marriage
- Divorce
- Change of address
- Purchase or sale of property (residential or investment)
- Improvements made to property purchased or sold
2. Organize your paperwork and receipts.
Do you have a system that works well for you in terms of gathering and organizing your tax documents? For some people, it helps to have a spreadsheet or other electronic system for compiling this information, while for others a hard copy dossier is more manageable. It’s important to remember that the burden of proof rests with the taxpayer. Typically, your CPA may not ask for receipts for things nor need to submit them with your return. However, should the IRS come knocking to ask for receipts or proof of deductions, then the responsibility is on the taxpayer. Keeping your receipts (paper or electronic) for 7 years is the recommendation and statute of the IRS. Here are a list of common expenditures which may require documentation:
- Childcare cost
- Home and office expenses
- Education costs
- Medical
- Charitable Contributions. Keep in mind if a charitable contribution is over $250 you need a written note / receipt for those
- Records of improvements to property during ownership – to assist your CPA in calculating the cost basis for your home
3. Keep track of estimated tax payments made.
Do you keep a record of when you have made tax payments to the IRS and the time period what year they relate to? It’s prudent to keep a detailed record of these payments and the tax year they relate to and to share that information with your CPA.
4. Be planned with making retirement contributions.
Do you have the key due dates noted in your diary for retirement contributions? Generally, you have until April 15, 2024 to contribute up to $6,500 to your traditional or Roth IRA and have it counted as a 2023 contribution for individuals. Businesses can make employer contributions as late as September 15th if the business files an extension from the March 15th deadline. It’s important to discuss the specific rules for your retirement plans with your advisor.
5. Provide your Identity Protection Pin.
Do you have a higher level of security applied to your tax profile? Due to the increase in fraudulent returns, the IRS is issuing some individuals IP-pins in addition to your social security number, for an extra layer of protection. Make sure to provide this to your CPA as soon as possible.
6. Keep a close eye on your email.
Have you signed up for paperless communications from your financial institutions and other organizations? If you are receiving a number of documents electronically, be sure to check your accounts (including junk mail) so that you’re not hunting for them down the track.
7. Only gather the necessary documents.
Have you clarified with your CPA what specific documents they’ll need from you for submission of your return? For example, your CPA does not need IRA statements unless there are distributions, since it is not a taxable account. Know your standard deduction threshold, and only spend the time to gather documents if you will exceed the threshold amount.
8. Declare if your dependents status changes.
Has your child turned 19 and is no longer in school requiring your support? Factors such as age, whether they attend school, how much support you are providing will come into play. If they turn 19 and are no longer in school and you are not providing over half of their support, you may no longer be able to claim them as a dependent.
9. Allow yourself adequate time for review.
Have you given yourself enough time to double (or triple) check your return? It’s important to review your tax returns before they are filed and ask questions if you need to. Ultimately you, the taxpayer, are responsible for the accuracy of the returns. Better to catch any errors or omissions prior to E-filing to avoid potentially having to amend the tax returns later. An amended return can incur additional accounting fees, penalties and/or interest, and can take extra time to process with the IRS.
10. Know that it’s OK to ask for an extension.
Are you struggling to gather all your information by the required date? If you end up filing an extension to allow additional time to file the tax returns, the tax is still due on the original due date. If you need additional time to gather information, ask your CPA for an extension. This is not an inherent red flag and only allows additional time to ensure the accuracy and completeness of the tax returns. Because the tax owed is still due, consider overpaying slightly as a cushion to avoid penalties for potential underpayment. Any overpayment can be refunded or applied to the following year.
Please note that there are always exceptions and it’s important to consult your tax preparer regarding your personal situation.
