As the new year begins, so does the countdown to tax season! By starting early in January, you can tackle tax time with less stress and more confidence, while also positioning yourself to identify valuable tax-saving opportunities. Here are some essential tips to help you get organized and prepared for a smooth tax season.
1. Gather and Organize Your Documents
One of the biggest hurdles in tax preparation is locating and organizing all the necessary paperwork. Make this process easier by creating a designated space, either a physical folder or a secure digital file, where you can store tax-related documents as they come in.
Essential Forms: Look out for W-2 forms if you’re an employee, 1099 forms for any freelance or contract work, and 1098 forms for mortgage interest or student loan interest paid.
Investment and Retirement Forms: If you have investments, be on the lookout for 1099-B (stock transactions), 1099-INT (interest income), or 1099-DIV (dividends received). Retirement accounts may issue a 1099-R for distributions.
Receipts for Deductions: Keep receipts for deductible expenses like charitable contributions, business expenses, or medical costs if they’re applicable to you.
Pro Tip: Label and scan documents as they arrive to create a digital backup, making it easy to share with a tax preparer or software if needed.
2. Review Last Year’s Tax Return
Looking back at your previous year’s tax return can provide a helpful refresher and guide you in collecting necessary documents for this year’s filing.
Identify Missing Documents: Reviewing last year’s return may remind you of income sources or deductions you need to account for again.
Check for Life Changes: Major life events, like marriage, buying a home, or having a child, can impact your tax situation. Knowing which forms and details were included last year gives you a good starting point for gathering this year’s information.
3. Maximize Tax-Saving Contributions Early
If you contribute to a traditional IRA, HSA, or other tax-advantaged accounts, January is an ideal time to confirm that contributions are on track. For the 2025 tax season, you can make contributions for the previous year up until the tax filing deadline, but starting early ensures you’re not scrambling last-minute.
Retirement Contributions: Contributing to an IRA can reduce your taxable income if you qualify for a deduction. The earlier you contribute, the more time your investment has to grow tax-deferred.
Health Savings Account (HSA): Contributions to an HSA are tax-deductible, grow tax-free, and can be used for qualified medical expenses. Make sure to max out contributions if possible.
529 College Savings Plan: In some states, contributions to a 529 plan offer state tax benefits. If you’re saving for a child’s education, contribute early to get a head start on those benefits.
Pro Tip: Automating contributions to tax-advantaged accounts can help you meet annual limits without needing a big, last-minute deposit.
4. Adjust Withholdings and Estimated Payments
If your income or financial situation changed over the past year, it’s worth reviewing your withholding or estimated tax payments to avoid surprises. January is a great time to make these adjustments.
Form W-4 Adjustments: If you’re an employee, update your W-4 form to adjust withholding amounts. This can prevent you from owing a large sum or receiving too small a refund.
Quarterly Estimated Payments: If you’re self-employed or have other untaxed income, consider adjusting quarterly estimated payments to better align with your income. This can help prevent penalties for underpayment.
5. Review Possible Deductions and Credits
Early in the year, consider potential deductions and credits that might apply to your tax situation. By identifying these in January, you can ensure you have the necessary documentation and receipts ready by the time you file.
Charitable Contributions: If you made donations, gather your receipts to claim the deduction. If you donated non-cash items, ensure you have documentation of their value.
Educational Credits: If you paid for tuition or student loans, check for eligibility for credits like the American Opportunity Credit or the Lifetime Learning Credit.
Home and Work Expenses: Certain home office expenses, mortgage interest, and property taxes may be deductible. If you work from home, keep records of expenses that may qualify for a home office deduction.
6. Decide How You’ll File
Tax filing methods vary depending on the complexity of your return. Decide early whether you’ll use tax software, work with a tax professional, or handle it yourself to streamline the process.
Tax Software: For straightforward returns, many people use software like TurboTax or H&R Block. These programs walk you through the steps and help identify potential deductions and credits.
Professional Help: If you have complex finances, like rental income or a business, consider consulting a tax professional. January is a good time to secure an appointment before the tax season rush.
IRS Free File: If you meet income requirements, you can use the IRS Free File program to file for free. This option becomes available each January.
Pro Tip: If you plan to work with a tax professional, start gathering documents in January and schedule an early appointment to beat the tax season rush.
7. Stay Ahead of Deadlines
Missing deadlines can lead to unnecessary penalties. Mark key tax deadlines on your calendar and plan ahead for a smoother filing experience.
Quarterly Tax Deadlines: If you make quarterly payments, note these due dates for 2025: April 15, June 15, September 15, and January 15, 2026.
Filing Deadline: Tax returns are typically due on April 15, but check with the IRS or your state tax board for any specific state requirements.
Extension Deadlines: If needed, you can request an extension to file by October 15. Remember, an extension to file isn’t an extension to pay, so estimate your tax liability by April to avoid penalties.
Make Tax Season Easier with Early Preparation
Starting tax preparation in January reduces stress, helps you catch errors or missing documents, and allows you to spot valuable tax-saving opportunities. With a bit of organization now, you’ll make the filing season far less daunting and set yourself up for a successful financial year.
