6 Ways To Prepare for Filing Your Taxes Before the New Year
Written by
Jamie Stone
Edited by
Jenna Klaverweiden
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When it comes to taxes, getting prepared can save you money and stress, and it can even help you find unexpected opportunities. By combining classic financial advice with a few unconventional strategies, you can tackle tax season head-on and make the process far less daunting.
Here are six tips you can use ahead of the new year to prepare for filing taxes.
Assess Your Taxable Income To Find Savings
“Assess your taxable income and decide if there are ways to lower it before Dec. 31,” said Shaun Bettman, accountant and chief mortgage broker at Eden Emerald Mortgages. For anyone contributing to tax-advantaged accounts like IRAs, 401(k)s or health savings accounts, this can be a powerful move.
If you’re nearing a higher tax bracket, additional contributions to these accounts could help you stay in a lower bracket, significantly reducing your overall tax liability. For families, 529 education savings plans offer not just state tax benefits but also prepare for future college expenses. However, Bettman stressed that “these contributions are tied to the calendar year, so taking action now is critical.”
Take Advantage of Tax-Loss Harvesting
Tax-loss harvesting is a smart move for investors looking to offset gains. “If you sold a profitable stock earlier in the year, selling a loss-making stock can help reduce your capital gains taxes,” Bettman explained. This strategy works particularly well if you’ve had a volatile year in the market and need to rebalance your portfolio.
Pay close attention to IRS rules, such as the wash-sale rule, which prevents you from repurchasing the same or substantially identical stock within 30 days of selling it. Violating this rule could negate your tax benefit.
Organize Your Tax Documents Now
Waiting until tax season to collect paperwork can cause unnecessary stress. “Gather all necessary tax documents — W-2s, 1099 forms, deductible receipts and invoices now,” Bettman said. If you’ve had freelance income, rental earnings or stock transactions, ensure you’ve got everything in order well before deadlines.
Doing this now will help you identify any missing paperwork, like 1099s, and give you time to chase them down.
‘Tax Jar’ Savings: A Practical Tip
While it might seem unusual, David Milo, president of Independent Lending, swears by the “tax jar” strategy. “Pay yourself first by estimating your tax liability and setting aside cash in a jar,” Milo said.
This simple but effective method can help you manage your funds without scrambling for tax payments at the last minute. Consider using some leftover holiday funds to start a tax jar ahead of the new year.
Keep a Record of Hobbies That Generate Revenue
If you’re someone who earns extra income from creative hobbies like crafting or photography, write down all related expenses now so you’re prepared come tax time. “Hobby-related costs can sometimes be used to lower your tax rate,” Milo explained.
Keep receipts and records for supplies, tools and fees that could count as business expenses. These small deductions can add up. View the new year as a good opportunity to get this in order.
Explore Innovative Learning With VR
For a unique approach, Milo recommended investing in virtual reality (VR) financial literacy tools. “It sounds crazy, but using VR for financial training can completely shift the way you think about your finances,” he said.
By understanding your finances better, you can approach tax preparation with less fear and more confidence.
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