Maximize your tax filing preparedness & awareness

Even though last year’s tax filing may be in the rearview mirror (if you did not file an extension), it’s not too early to think about tax preparation for this year. One of the biggest impediments to completing individual and corporate tax returns is lack of proper documentation and recordkeeping.

To make your life easier, here are some reminders of the types of documentation and records that support your annual tax return and suggestions for maximizing your tax filing preparedness between now and next April.

If there is a specific issue with your tax return, the IRS has years to audit your information. It’s critical to maintain the records you may need to defend yourself. You generally need to keep the documents that support your income, deductions and credits for at least three years after a tax-filing deadline.

Essential documentation to retain may include:

• Form W-2
• Forms 1099-NEC and 1099-G
• Form 1098
• Property tax payments
• Charitable donation receipts
• Records related to contributions to and withdrawals from Section 529 plans and HSAs
• Records related to deductible retirement plan contributions

Hold on to records relating to property (including improvements to property) until the period of limitations expires for the year in which you dispose of the property. You’ll need those records to calculate your gain or loss.

You should be collecting the documentation you’ll need for next year’s tax filing deadline on an ongoing basis. Keep up-to-date records of items such as charitable donations and mileage expenses.

If you make estimated tax payments throughout the year, consider reevaluating the amounts you pay. You might want to increase or reduce the payments on account of changes in self-employment income, investment income, Social Security benefits and other types of nonwage income. To preempt the risk of a penalty for underpayment of estimated tax, consider paying at least 90% of the tax for the current year or 100% (if adjusted gross income is less than $150,000 for married taxpayers filing a joint return) of the tax shown on your prior year’s tax return, whichever amount is less.

When it comes to strategies to reduce your 2022 tax bill, recent downturns in the stock market may have some upside. If you have substantial funds in a traditional IRA, this could be a ripe time to convert them to a Roth IRA. Roth IRAs have no required mandatory distributions, and distributions are tax-free. You must pay income tax on the fair market value of the converted assets, but, if you convert securities that have fallen in value or you’re in a lower tax bracket in 2022, you could pay less in taxes now than you would in the future. Moreover, any subsequent appreciation will be tax-free.

The market downturn could provide loss-harvesting opportunities, too. By selling poorly performing investments before year end, you can offset realized taxable gains on a dollar-for-dollar basis. If you end up with excess losses, you generally can apply up to $3,000 against your ordinary income and carry forward the balance to future tax years. Be mindful of the wash sales rules when harvesting current year tax losses.

Tax planning is an ongoing challenge. Take it one step at a time, be prepared, and you’ll be better set up for next year.