The last thing you probably want to add to your list of things to do is work on your tax situation. However daunting your taxes may be, not being proactive about making the right preparations before filing could cost you your sanity, especially if you wait too long to file without having to rush it.
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By taking some important steps first, you can not only make things easier for yourself before you file your taxes this year, but you can also help make things easier for the following year as well. Here are some of the most important tax-related steps you should consider getting out of the way before filing.
Make a Prior-Year Contribution to Your IRA
For many retirement plans, the contribution window for any given year shuts down on Dec. 31. However, for IRAs, you can contribute any time before the tax filing date — which is typically April 15, but extends to April 18 in 2023.
This is an extremely generous provision that allows you to boost your retirement contributions after you have a preliminary look at where you stand tax-wise. For example, if you take a practice swing at your taxes and find that you’ll owe $1,000, you may be able to make a $3,000 or $4,000 IRA contribution and eliminate that liability altogether, depending on your tax bracket. Just be sure to note that you are making a “prior year” contribution at the time you put money into your IRA, otherwise your custodian may credit you with a contribution for the current year instead.
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Start or Increase Your Monthly Retirement Plan Contributions
If you haven’t yet begun contributing to a retirement plan, the only better time to start than yesterday is now. If you’re already contributing to an IRA or 401(k) plan, start increasing your contributions as soon as possible. If you’re used to setting aside, say, 5% of your income every month, try boosting that percentage to 6% or 7%. You’ll likely hardly notice that small increase, but over the long run, it can significantly boost your retirement nest egg. You’ll also start reducing your tax bill for next year — or for this year if you are making prior-year IRA contributions before the tax filing date.
Get Organized for Tax-Filing Season
Although April is usually referred to as “tax-filing season,” the reality is that you start getting tax documents as early as the end of January. But even before considering your W-2s, 1099s and other tax forms, you’ll want to collect all of the important supporting paperwork to which you already have access.