Updated Jan. 1, 2021: It’s been a couple years since the Tax Cuts and Jobs Act went into effect, ushering in big changes to U.S. tax laws. Many Americans still remain mystified as to how the changes affect them.
With uncertainty still lingering in the air, the best thing you can do today is prepare yourself for next year’s tax season using these simple five tips:
1. Start determining your 2021 tax strategy today
Although Tax Day 2020 is a year away, remember that your taxes are a look back at the prior calendar year. The tax return due on April 15, 2020, considers all your activities during the 2019 calendar year. That means making changes to your tax strategy now can make preparing your return next year easier.
2. Adjust your withholding
Many taxpayers who filed their returns in late January and February this year expected a refund. But they discovered they actually owed money to the IRS. (Learn why.)
Fixing the surprise tax bill problem is simple. You may have missed it, but the IRS made updates to the withholding tables immediately following the tax law changes. These tables determine how much you set aside for taxes from each paycheck. Many taxpayers failed to update their W-4 forms, which tell employers how much to withhold for taxes, in 2018. In fact, only one in five did so, according to a 2018 H&R Block survey.
By not doing so, many taxpayers failed to withhold enough of their paychecks throughout the year to put toward their taxes, resulting in the surprise bill.
To keep that problem from repeating itself, be sure to check and update your W-4 so your withholding is accurate. Not sure how much to withhold? Check out the handy withholding calculator on the IRS website and read our guide to using it.
3. Carefully track your possible deductions
Just as in every previous year, keep track of your receipts, invoices and bills in a centralized location. For individuals, this could be medical bills, donations, local taxes and more. For small business owners, this could be travel expenses, mileage driven, retirement contributions or other deductible business expenses.
It’s always better to have more documentation than less. Pulling together your paperwork early and in one central location will make your life easier come next tax season.
4. Read up on the new tax laws
If you find yourself with spare time, read up on the updated tax law. We’ve written a general guide and we’ve also gotten into the specifics, from tax deductions that are going away to how the new tax law affects life insurance policies.
5. Fund your retirement
Whether you have a 401(k) through your employer or an equivalent retirement plan, it’s a good idea to look at your retirement account contributions at the same time you review your W-4. Funding your retirement account comes with tax benefits. You can contribute to traditional retirement accounts tax-free, while you can withdraw from Roth accounts tax-free in retirement. Aside from the tax benefits, you’re also making it easier to reach your retirement goals.
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Image: Sean Locke