After tax day: Take these action steps
The April deadline for filing taxes has passed, but that doesn’t mean you should forget about them until next year. If you filed on time and didn’t file for an extension, here are three tax-related activities you should consider taking to prepare for the next Tax Day.
1. Retain and prepare your Tax Day records
The IRS has years to audit your tax return, depending on the exact issue. So, it’s vital to save the records you’ll need to defend yourself. After the tax-filing date, you should maintain the records that substantiate your income, deductions, and credits for at least three years. (Note that the IRS has no time restriction for pursuing taxpayers who don’t file or file fraudulent returns.)
The following are examples of essential documents to keep:
- Form W-2, “Wage and Tax Statement”
- Documents concerning deductible retirement plan contributions
- Records related to contributions to and withdrawals from Section 529 plans and Health Savings Accounts
- Form 1099-NEC, “Nonemployee Compensation,” 1099-MISC, “Miscellaneous Income,” and 1099-G, “Certain Government Payments”
- Charitable donation receipts
- Form 1098, “Mortgage Interest Statement”
- Property tax payments
Keep property records (including renovations to property) until the statute of limitations for the year you sell the property ends. Eventually, you’ll need those documents to determine whether you made a profit or a loss.
2. Plan for your 2022 taxes
It would be best if you were regularly gathering documentation to prepare for Tax Day next year. In addition, you must maintain accurate records of charitable donations and mileage charges.
In addition, now is an excellent time to review your existing tax withholding to see if your Form W-4, “Employee’s Withholding Certificate,” needs to be updated. If you owe taxes this year, you may wish to raise your withholding. If you get a large refund, on the other hand, you may want to minimize it. Alterations may be necessary if you intend to go through significant life changes this year, such as marriage, divorce, childbirth, or adoption.
Consider reevaluating your projected tax payments if you make them throughout the year. Due to changes in self-employment income, investment income, Social Security benefits, and other nonwage income, you may choose to increase or decrease your payments. Consider paying at least 90% of the tax for the current year or 100% of the tax stated on your preceding year’s tax return to avoid the risk of a penalty for underpayment of anticipated tax.
Prepare for the next Tax Day
Recent stock market downturns may have some benefits regarding tax-saving options for 2022. If you have much money in a regular IRA, now is a perfect moment to convert it to a Roth IRA. There are no mandated distributions in a Roth IRA, but the distributions are tax-free. You must pay income tax on the fair market value of the converted assets. Still, if you convert securities that have lost value or if you are in a lower tax rate in 2022, you may pay less in taxes now than in the future. Furthermore, any additional growth will be tax-free.
Loss-harvesting opportunities may arise as a result of the market slump. You can offset realized taxable gains on a dollar-for-dollar basis by selling underperforming investments before the end of the year. If you have excess losses, you can typically deduct up to $3,000 from your regular income and carry the remaining forward to future tax years.
If you itemize deductions on your tax return, consider “bunching” anticipated medical bills into 2022 to maximize your chances of claiming the medical and dental expense deduction. You can deduct unreimbursed expenses that exceed 7.5% of your adjusted gross income. For example, accelerating a knee replacement surgery (together with all the follow-up appointments and physical treatment) into this year could push you over the 7.5% mark.
3. Respond to an IRS question or audit
Suppose you receive a tax return question or audit letter from the IRS. (You will only be alerted by letter – the IRS does not initiate inquiries or audits by phone, text, or email.) In that case, you may have no choice but to keep thinking about your taxes. Although such communications can be concerning, do not assume the worst.
It’s crucial to remember that being asked a question or being chosen for an audit doesn’t always mean you’ve made a mistake. For example, a statistical algorithm that examines similar returns for deviations from “norms” could have highlighted your tax return.
Furthermore, if chosen, you will be subject to a correspondence audit, accounting for more than 70% of IRS audits. They’re done by mail for a single tax year. Additionally, they only entail a few difficulties that the IRS expects to resolve by reviewing relevant documentation. According to the IRS, most audits involve returns filed within the last two years.
Be prepared and stay ahead of the Tax Day game
If you are subject to a correspondence audit, you and your tax advisor should carefully follow the guidelines. If you cannot submit all needed paperwork by the deadline, you may request more time. It’s best to submit copies of documents rather than originals. Each sheet should contain your name, Social Security number, and the tax year under investigation.
Do not disregard the letter. If you do so, the IRS will eventually deny the claimed item(s) and issue a Notice of Deficiency (a notice that a balance is due). After receipt, you have 90 days to appeal to the United States Tax Court.
While correspondence audits are the most prevalent, the IRS may also select you for an office audit at an IRS office or a field audit at the taxpayer’s place of business. These audits are more involved, and you should get advice from a tax specialist who has experience with these types of examinations.
Tax planning is a never-ending task. We can assist you in taking the appropriate actions to reduce your filing burden, tax liability, and the possibility of poor results if you receive an audit notice. Contact our RRBB accountants and advisors today.
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