Ready to file your taxes? Here are some tax season tips to reduce your headache and dread.
And maybe even reduce the taxes you owe next year!
1. Find the right tax filing tool or professional
Some people hire a CPA for their taxes, but most – especially those in their 20s- could probably file on their own.
If you only have W-2 income, a couple of accounts, and file in one state, it’s easy to do this yourself.
There are many tax filing websites out there to choose from. I would avoid TurboTax, as they charge expensive fees and purposely lobby against making taxes easier so that more people would use their program.
My husband and I use and recommend FreeTaxUSA.com which is very intuitive and easy-to-use. The website lets you file your federal tax return for free and charges just $14 for each state tax return.
If your tax filing scenario is as simple as described above, try using FreeTaxUSA.com as it’ll be the most cost-effective and time-saving way.
However, if your tax return is complicated- for instance, if you are filing in multiple states, have complex assets, and have a bunch of different tax forms, I would consider hiring a CPA.
Yes, it will be more expensive, but in the end, this will save you time and a headache.
If you do work with a CPA though, ask for a flat fee and pay upfront; otherwise, they could charge you by the hour which can be very expensive.
2. Stay organized with tax forms
Probably the biggest reason we all dread tax season is all the different forms it comes with.
Talk about anxiety-inducing!
One of the most important tips to reduce your tax-season headache in the future is to keep your documents organized. Keep track of all of your financial accounts, so you know which documents you need.
Make a list of each account and the form you’ll need to track- 1099-INT for your savings accounts, 1099s for brokerage accounts, your W-2s from work, etc. Many of these forms can also be accessed via your online accounts.
This will be especially helpful as you go through life changes like moving or getting married, which are super common in our 20s and 30s!
With each life change, make sure to update your W-4, and answer the tax form questions correctly. This will ensure that the correct amount of taxes is taken out of your paycheck.
In addition, if you have a side hustle, you will need to report the income you make through it as well. The good news is- you can also enter any expenses related to your side hustle to lower the income that you need to pay taxes on.
3. Consider increasing your retirement contributions
If you are genuinely upset about how much you owe in taxes this year, time to consider this step!
Calculating our income tax is not straightforward, but there are sure ways to reduce our taxable income.
Taxable income is the amount of your total income that you have to pay taxes on. It’s another term for Adjusted Gross Income (AGI), which you may have seen on some tax documents.
But just because you make $100k does not mean you pay taxes on all $100k! Many factors can change the amount of your income that is taxable.
For example, try contributing more to your 401k or your Health Savings Account. Because contributions to these accounts are pre-tax, the money you contribute will be taken out from your pay before taxes, and only the leftover amount will be taxed.
Example
For simple math, let’s say you make $100k.
And say you contribute 5% to your 401k, which equals $5k in one year.
What would happen if you increased your contribution to 10%? You would not only have $5k more in your 401k (plus whatever match your employer gives you) but also owe $1,400 less in taxes.
If you increase your contribution to 20%, you pocket $20k in your 401k and pay over $4k less in taxes!
Of course, this means your take-home pay will be less, but the money that’s taken will always be less than what you keep for yourself.
I understand not everyone has the means to max their 401k, but try increasing how much you contribute by 1% every year and see it grow way beyond!
4. Keep track of possible deductions
A tax deduction is the amount you can subtract from your taxable income to lower the amount of tax you owe.
Some examples include charitable giving, student loan interest, spending on work commutes, rent, etc.
So keep track of them all because they may help in reducing your taxable income. You will receive a 1098-E for student loan interest and usually a giving statement from the charities and/or religious organizations you donate to.
This might not apply to everyone, and it depends on other variables like your income and the state you live in, but it doesn’t hurt to track!
Bonus: If you bought a qualified electric vehicle, don’t forget to take your tax credit on your tax return! (I assume you’re probably already aware of this if you bought an EV though)
Bottom line
I get it, doing your taxes may seem like a daunting process.
But in reality, it’s pretty easy if you use the right tools and have the essential knowledge.
The number one tip to make your tax season a little more stress-free would be to stay organized with your documents and follow what the tax website says.
Good luck!
