5 Ways to Start Planning for 2023 Taxes… Now!
Even if you haven’t filed your 2022 income taxes, it’s time to start thinking about tax year 2023.
We’ve talked about the importance of year-round planning before. There are at least three good reasons for this:
You’ll be less likely to forget to record expenses you can deduct.
If you’re required to pay quarterly taxes, you’ll find it easier to estimate these.
Your tax preparation will be a lot less frantic and anxiety-producing.
Whether you are filing taxes as an individual or for a side gig or a small business, taking some time every month to start preparing for the current year’s taxes may well impact the size of your tax liability.
Here are five suggestions for actions you can start taking right now.
1.Use a personal finance or small business accounting application.
You have heard their names before… Mint, QuickBooks, Quicken, FreshBooks, etc. All of these financial solutions are affordable (Mint is free!) and they will change your life if you are managing your finances on paper or even with Excel. You can connect your bank accounts to them and import transactions so you always know what has been coming in and going on.
You can create budgets. Send invoices and pay bills. Run reports. Basically, you can track your income and expenses so you will always know whether you are spending too much (and in what areas) and how that might affect your taxes.
Mint (free) can help you stay on top of your income and expenses and better plan for taxes.
2. Create Reports Regularly
This is so easy if you are using a financial application. A couple of clicks, and you will know how much money you are making and exactly how you are spending it. You will be able to see quickly who you owe money to and who owes you. This is difficult and time-consuming if you are tracking your finances manually. You will need to set up a system of paper or digital file folders and store bills, invoices, receipts, etc., without fail.
It’s important to keep an eye on the details, but reports can provide broad overviews that can be helpful come tax time.
If you’re a small business, there are financial reports that you should be running at least quarterly, but especially if you are trying to get a loan or other financing. These include Profit & Loss and Trial Balance. You can generate these automatically if you’re using an accounting application, but they’re difficult to analyze. We can help with this - reach out!
3. know what you can save on deductible things like energy consumption
The IRS Form 1040 has included energy credits for years, but recent legislation has improved them by quite a bit. Ask us about this.
This is a very good example of why year-round tax planning can benefit you. If you’re not anticipating having enough deductions and credits to offset your income, you can take steps during the year to make purchases that you need anyway but which will also give you a tax break.
Do you know about recent changes to energy credits? Talk to us about this.
4. watch your expenses like a proverbial hawk.
If you’re a gig worker or own a small business, this is critical. You want to be able to counteract your income with all of the expenses that are legally allowed. This can be a bit of a gray area. The IRS says that businesses (including gig workers) can claim expenses that are, “…ordinary and necessary.” You should be able to deduct purchases that are directly related to your work.
Are you driving for Uber on the side? Document your vehicle expenses to the penny. Doing graphic design work for multiple clients? Look at the IRS list of Schedule C expenses categories so you don’t miss anything (advertising, office expenses, etc.).
Just as you don’t want to claim anything that would be suspect to an IRS auditor, do deduct all of the expenses that you think are legitimate. And keep your receipts is a safe place, either paper or digitized. Store them after you’ve prepared your taxes and don’t get rid of them for at least three years from the date you file.
Look at the IRS Schedule C categories as you’re determining whether you can deduct business expenses, even if you just have a side gig.
5. Adjust your Withholding
Everyone loves a tax refund. But if you’re a W-2 worker who’s getting thousands of dollars back, you’re letting the government keep your money for a while unnecessarily. Talk to your employer as soon as you know you want to change your withholding.
You’ll need to complete another IRS Form W-4. Self-employed individuals, of course, should do their own withholding in preparation for making quarterly payments.
6. planning Can Lead to Action
If you do the things we’ve suggested here, you’ll understand why year-round planning is so critical. You may have to take some action during the tax year so it’s reflected on your Form 1040 the following April. We’ll be happy to consult with you on your taxes, whether you’re an individual or a small business or a part-time marketplace seller. It’s a busy time of year, but contact us if we can help.
