That huge swooshing noise you heard earlier? It was the sound of hundreds of thousands of taxpayers and tax professionals breathing a sigh of relief now that tax season is finally over—except for those of us on extension, of course.
Now that Tax Day has passed, it can be easy to tuck away your tax documents and vow not to look at them for another year. But that would be a mistake. Before you file your tax returns away, here are some steps that you can take now to guarantee a better tax result next season.
Review your federal withholding
If you owed tax this year—or if you were lucky enough to get a bigger-than-expected tax refund—take a look at your federal withholding. If you didn’t? Still, take a peek. You should check your tax withholding every year.
You can check your withholding online using the IRS tax withholding estimator. The tool helps estimate the federal income tax you want your employer to withhold from your paycheck. You’ll need your recent pay stubs, as well as income information from investments, gigs, and the like, together with your most recent tax return.
If you need to make changes, you’ll need to fill out a new Form W-4. Form W-4 is the form that you complete and give to your employer—not the IRS—so that your employer can figure out how much federal income tax to withhold from your pay. You typically fill out a Form W-4 when you start a new job or at the beginning of the year.
It’s important to note that the IRS changed Form W-4 beginning in 2020, so it may look very different if you haven’t checked yours out in a while.
Check state and local withholding
As a result of the pandemic, workplaces look very different. Some offices may be back to capacity, while others may entertain a hybrid or remote workforce. And you may not be working at the same geographic location as you did a few years ago. That can make payroll—and state and local withholding—tricky.
Typically, your state and local withholding are simple if you live and work in the same state. But if you work remotely, especially if your company is registered in a different state, your state and local tax obligations may be complicated. Some states have reciprocity with neighboring states, and others may require that you file separate returns. If you’ve moved homes, jobs, or job locations, you should check your withholding to make sure that it properly reflects your current situation.
Review retirement contributions
For most taxpayers, making contributions to retirement accounts can be an easy way to save for the future and get an immediate tax break since deductions may be deductible or excludable. Think you can’t afford it? Think again. Let’s say you make $50,000 per year. By simply opting for a 3% contribution rate, you’re moving $1,500 per year to a tax-deferred account—if your employer offers a match, you’re pushing $3,000 per year to a tax-deferred account. That means it grows tax-free until retirement.
When possible, I recommend arranging for an automatic transfer since you likely won’t miss it if you don’t see it in your account. If you’re not sure how much to earmark, talk with your retirement or financial adviser to see what you can afford. The more you stash away without paying taxes on that money today, the more you’ll have for retirement later.
Keep in mind that not all retirement plans are tax-deferred. You’ll pay the tax now if you opt for a Roth IRA or other retirement account, but your money will grow tax-free forever.
Think about dependents
There’s a famous line in the movie “Ferris Bueller’s Day Off” where Bueller utters, “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.” I promise you that’s true. In any given year, your life can change dramatically. You might have gotten married or divorced. You might have added children—or waved goodbye as your grown children packed up and moved out for college or a new job. Maybe you moved back in with your parents. Or maybe your parents moved in with you.
If your situation has changed since year-end, or if you expect it to, make a mental note to share that information with your tax professional. It could impact deductions or other credits that you or your family members might be entitled to claim.
Top up HSA and FSA accounts
Medical costs feel like they keep going up. But, due to the doubling of the standard deduction and the floor for medical expenses—your deductible medical expenses are only those exceeding 7.5% of your adjusted gross income (AGI)—most taxpayers will not claim the medical expense deduction. That’s why it’s smart to take a look now to make sure that your Health Savings Account (HSA) or Flexible Spending Account (FSA) is appropriately funded to take advantage before the year-end catches you by surprise.
If your employer offers an FSA, you can put aside pre-tax dollars for qualifying medical expenses, including insurance co-pays and deductibles. Employer contributions can be excluded from gross income, while employee contributions taken out of your paycheck are not subject to employment taxes or federal income taxes. FSA dollars are intended to pay for qualified medical expenses—those withdrawals are income-tax-free—while distributions from a health FSA that are not used for qualifying medical expenses will be subject to tax and a penalty. You must spend the money in the account each year, or you forfeit the remainder—this is sometimes called the “use it or lose it” rule, so plan accordingly.
Typically, to qualify for an HSA, you must be covered under a high deductible health plan—but there are no income limits or a requirement that the account owner has earned income. You and your employer can contribute to your HSA in the same year. If family members or others want to contribute on your behalf, that’s okay, too, subject to the contribution limits. For 2022, those limits are $3,650 for self-only coverage or $7,300 for family coverage—plus $1,000 if you’re age 55 or older.
Funds in an HSA can be rolled over from year-to-year and will grow federal income tax-free, making it a good idea to top up accounts if you haven’t met your limits. Plus, an HSA is portable, so you get to keep it even if you change employers, retire, or otherwise leave the workforce.
Make estimated payments
Typically, you’ll need to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your tax return. This rule applies to self-employed and gig economy taxpayers and to those taxpayers who may receive income from other sources not subject to withholding—these tend to be landlords, S corporation shareholders, partners in a partnership, or taxpayers with significant investments. To make estimated payments, you’ll figure your estimated tax using Form 1040-ES.
For estimated tax purposes, the year is divided into four payment periods, about once every quarter. The due dates for 2022 estimated payments are April 18, June 15, Sep. 15, and Jan. 17, 2023.
Set an appointment with your tax pro
If you find yourself dashing to your tax professional’s office every year close to Tax Day, while promising to do better next time, take the opportunity to make a change now. Many tax professionals work year-round and may have more time to meet with you for a mid-year check-up before extension season begins. Give yourself—and your tax professional—a break by getting something on the books now.
This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.