For some people, the outbreak of the COVID-19 pandemic completely changed their financial outlook. Despite the best-laid plans, there are some things that happen in life that are completely unexpected and unplanned. This year’s tax season may have been a scramble for many companies and individuals alike, as they adjusted to business changes, changes in budgets and valuations, and a falling stock market. However, now that this year’s delayed Tax Day has finally come and gone, we can begin looking forward to the future. It is never too early to start planning for next year’s Tax Day to help make the process go smoothly.
Why It’s Important to Plan for Taxes:
Many mistakes can occur for those who do not plan for their taxes. For example, leaving taxes until the last second can lead to late or missed filings— leaving you open to the risk of an IRS audit. USA Today recently found that taxpayers in the lowest income bracket were the most likely to be chosen for an IRS audit. No matter which income bracket you fall into, however, it is never a good idea to miss filing your taxes.
It is also not suggested to file your taxes without doing your research first. If you leave taxes to the last second, you may not have time to research available deductions or tax credits that could be of great benefit to you. You may also file incorrect information or leave out auxiliary forms that were required.
Overall, planning for taxes will not only help you turn your taxes in on time, but it will also help you maximize your return and minimize any chances for error.
How to Plan for Taxes:
Organization is key when planning for taxes. As the big day approaches, it is important to gather up all of the receipts and paperwork that may be required— and, of course, the best way to find these papers is to never lose track of them in the first place. Implementing a filing system can help taxpayers keep their important documents organized. Moreover, having a clear and precise organization system can allow taxpayers to see which parts of the tax filing process they need to prioritize first.
Do Your Research
Who is considered a dependent? Which forms are needed? What are some common tax credits? These are just a few of the questions that a taxpayer should research ahead of time, either by sifting through reading materials, discussing concepts with trusted friends or family, or reaching out to a tax specialist. While it is not possible to go through every different question that may arise during the tax planning process, here are the answers to each of those questions listed above.
Who is Considered a Dependent?
In general, dependents are children or other relatives of the taxpayer who are financially dependent on the taxpayer and made under a certain amount of money that year. Furthermore, dependents must be US citizens who have lived in the taxpayer’s home for a full year. They also cannot file their own individual or joint taxes themselves, or be claimed as a dependent by someone else.
Which Forms are Needed?
It can seem like there are a million different forms to fill out when filing taxes, but some forms will apply to individual situations while others will not.
As for some of the most common forms, a few stand out in particular. If you are a US citizen or resident alien, you might only need to file Form 1040 or Form 1040-EZ. If you are a nonresident alien, file Form 1040-NR.
Some forms, on the other hand, are tailored towards niche groups of taxpayers only. For example, Form 3520 should be completed by people who have foreign trusts. This form may be necessary for expats who spend time overseas or resident aliens who are in the USA on long-term visas.
What Are Some Common Tax Credits?
While there a number of different available credits, the Earned Income Tax Credit and Child and Dependent Care Credit are applicable options for many people. There is also the Lifetime Learning Credit and American Opportunity Tax Credit that provide credits for people pursuing higher education. Again, there are many different credits available, so taxpayers should do their research ahead of time to find out which ones are applicable.
If planning for taxes seems too time-consuming or overwhelming for one person to do alone, it is always suggested to ask for help. Tax specialists can provide specific instructions about when, when, and how to start planning; and they can continue to provide assistance throughout the entire process. If you need help, contact the experts at Bogart Wealth for Tax Preparation assistance.