Candace J. Dixon
Year-round tax planning is important for everyone; what you do now affects any tax you might owe or refund you may expect next year.
Practice Good Recordkeeping
The first step of good tax planning is good recordkeeping. Gathering tax documents throughout the year and having an organized recordkeeping system makes filing tax returns or understanding a letter from the IRS easier.
Good records help you do the following:
Identify sources of income. You may receive money or property from a variety of sources. The records can identify the sources of income and help separate business from nonbusiness income and taxable from nontaxable income.
Keep track of expenses. You can use records to identify expenses for which you can claim a deduction. This will help determine whether to itemize deductions at filing. It may also help you discover potentially overlooked deductions or credits.
Prepare tax returns. Good records help you file your tax return quickly and accurately. Throughout the year, you should add tax records to your files as you receive them to make preparing a tax return easier.
Support items reported on tax returns. Well-organized records make it easier to prepare a tax return and help provide answers if the return is selected for examination or if you receive an IRS notice.
The IRS suggests that you keep records for three years from the date you filed the tax return. You should develop a system that keeps all your important information together. You can use a software program for electronic recordkeeping. You could also store paper documents in labeled folders.
Records to keep include:
Tax-related records. This includes wage and earning statements from all employers or payers, interest and dividend statements from banks, certain government payments like unemployment compensation, other income documents and records of virtual currency transactions. You should also keep receipts, canceled checks, and other documents – electronic or paper - that support income, a deduction, or a credit reported on your tax return.
IRS letters, notices and prior year tax returns. You should keep copies of prior year tax returns and notices or letters you receive from the IRS. These include adjustment notices when an action is taken on the your account, Economic Impact Payment notices, and letters about advance payments of the 2021 child tax credit. If you receive 2021 advance child tax credit payments you will receive a letter early next year that provides the amount of payments you received in 2021. You should refer to this letter when filing your 2021 tax return in 2022.
Property records. You should also keep records relating to property they dispose of or sell. You must keep these records to figure your basis for computing gain or loss.
Business income and expenses. For business taxpayers, there's no particular method of bookkeeping you must use. However, you should find a method that clearly and accurately reflects your gross income and expenses. If you have have employees you must keep all employment tax records for at least four years after the tax is due or paid, whichever is later.
Health insurance. You should keep records of your own and your family members' health care insurance coverage. If you're claiming the premium tax credit, you'll need information about any advance credit payments received through the Health Insurance Marketplace and the premiums you paid.
Review Eligibility for Credits and Deductions
Tax credits and deductions can mean more money in your pocket. Most people only think about this when they file their tax return, but early planning can help make filing your 2021 tax return easier.
You should be prepared to claim tax credits and deductions.
Here are a few facts about credits and deductions that can help you with year-round tax planning:
Taxable income is what’s left over after you subtract any eligible deductions from your adjusted gross income. This includes the standard deduction. In fact, most individual taxpayers take the standard deduction. On the other hand, you may choose to itemize your deductions because it could lower your taxable income.
As a general rule, if your itemized deductions are larger than your standard deduction, you should itemize. Also, in some cases, you may even be required to itemize.
You can use the Interactive Tax Assistant to see what expenses you may be able to itemize.
You can subtract tax credits from the total amount of tax you owe. To claim a credit, you should keep records that show your eligibility for it.
The American Rescue Plan made changes to several valuable tax credits including, the child and dependent tax credit, the childless earned income tax credit, the childless earned income tax credit and the child tax credit. It’s important for you to understand how these changes may affect your 2021 tax return.
Properly claiming tax credits can reduce taxes owed and boost refunds. You can check now to see if you qualify to claim it next year on your tax return. Some tax credits, like the EITC, are even refundable, which means you can get money refunded to you even if you don’t owe any taxes.
Pay the Correct Amount of Tax Throughout the Year
Federal taxes are pay-as-you-go. This means that you need to pay most of your tax during the year, as you earn income. This can be done either through withholding or estimated tax payments.
If the amount of income tax withheld from a your salary or pension is not enough, or you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may need to make estimated tax payments. If you are self-employed, you may also need to make estimated tax payments.
Adjust Your 2021 Withholding
You should review your federal withholding each year to make sure you're not having too little or too much tax withheld.
Employees, retirees and self-employed individuals can use the IRS Tax Withholding Estimator to help decide if they should make a change to their withholding. This online tool guides users, step-by-step through the process of checking their withholding, and provides withholding recommendations to help aim for their desired refund amount when they file next year. You can check with your employer to update your withholding or submit a new Form W-4, Employee's Withholding Certificate.
Make 2021 estimated tax payments
Estimated payments are another way for you to pay what you owe in separate quarterly payments. For tax year 2021, remaining quarterly estimated tax payments are due from individual taxpayers on June 15 and September 15, 2021, and January 15, 2022. The fastest and easiest way to make estimated tax payments is electronically using Direct Pay or Electronic Federal Tax Payment System. You can find other payment options on the IRS website.
Use the Correct Filing Status for Accuracy
You need to know your correct filing status and be familiar with each option. The IRS Interactive Tax Assistant can help you determine your filing status.
Your filing status typically depends on whether you are single or married on Dec. 31, which determines your filing status for that entire year.
More than one filing status may apply in certain situations. If this is the case, you can usually choose the one that allows you to owe the least amount of tax.
When preparing and filing a tax return, the filing status affects:
If the you are required to file a federal tax return
If you should file a return to receive a refund
Your standard deduction amount
If you can claim certain credits
The amount of tax you should pay
These are the five filing statuses:
Single. Normally, this status is for individuals who are unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
Married filing jointly. If an individual is married, they can file a joint tax return with their spouse. When a spouse passes away, the widowed spouse can usually file a joint return for that year.
Married filing separately. Married couples can choose to file separate tax returns. When doing so, it may result in less tax owed than filing a joint tax return.
Head of household. Unmarried individuals may be able to file using this status, but special rules apply. For example, they must have paid more than half the cost of keeping up a home for themselves and a qualifying person living in the home for half the year.
Qualifying widow or widower with dependent child. This status may apply to an individual if their spouse died during one of the previous two years and they have a dependent child. Other conditions also apply.
Resources: Advance Child Tax Credit in 2021
Pay as You Go, So You Won't Owe Estimated Taxes Form W-4S, Request for Federal Income Tax Withholding from Sick Pay Form W-4V, Voluntary Withholding Request
Publication 501, Dependents, Standard Deduction, and Filling Information