Ask many Americans about their experience with tax time and they are likely to describe lots of paperwork, confusing rules, and late nights on their computer.
But it doesn’t have to be that way! Getting organized now – instead of waiting until the days before April 15 – may help streamline your tax preparation and help you identify deductions that you would otherwise overlook in the last-minute rush.
Use this list to gather necessary documents and optimize your taxes for 2023 and beyond.
Tax Preparation Documents
There are a few documents everyone will need to get started, including:
- A Form W-2 from your employer. This is the starting point for determining your taxable income.
- A Form 1099 and/or other statements from investment firms. These help you compute capital gains, which are taxable, or capital losses, which you may be able to deduct. Keep in mind that dividends and interest are taxable at ordinary income tax rates. Contributions to a traditional IRA may be tax deductible if you meet income thresholds established by the IRS.
- Real estate records. You may be able to deduct mortgage interest and real estate taxes. Expenses associated with investment real estate may also be deductible. If you sell real estate at a profit, you may be required to pay taxes on a portion of the gain.
After you have accounted for the most common aspects of tax preparation, dig a little deeper to discover other areas of your life that may offer tax breaks.
Tax Tips for Parents
Children are not just a blessing to your family – they also bring with them a host of potential tax breaks. Here are a few to keep on your radar this year:
- Dependency exemption. You likely qualify for a dependency exemption if you have a minor in your care. However, if your adjusted gross income is above a certain level, you may not receive the full exemption amount.
- Child Tax Credits. The Child Tax Credit can be worth varying amounts depending on your income and which credits you received during the Covid-19 pandemic. Consult with your tax planner to discuss how much of a tax credit you can expect.
- Child Care Credit. If you paid childcare for a dependent child under age 13 so you could work, you can earn a credit of north of $1,000. If you are paying for the care of two or more children, the potential credit you can earn increases to more than $2,000. As with most other tax breaks, the size of the credit depends on your income and, in the case of this particular credit, how much you pay for care.
- Adoption credit. If you adopted a child in 2022, you can claim a credit to help offset the cost. Income phase-outs apply for adjusted gross incomes beginning at the $200,000+ range.
You may be able to benefit from either a tax deduction or a tax credit if you had any of these types of expenses during 2022:
- Purchased an electric car or plug-in hybrid.
- Had student loan debt paid by parents.
- Had out-of-pocket expenses related to a job search.
- Had moving expenses associated with a first job.
- Were self-employed and paid Medicare premiums.
- Had jury duty pay that was surrendered to employer.
- Utilized the American Opportunity Credit and/or other government-sponsored education programs to pay for education expenses.
- Made energy-saving home improvements.
These are just a few of the tax savings that may await you come April 15. Of course, your individual circumstances will determine if you are eligible for these and other tax breaks. Your tax professional should be able to provide more information on what you do and don’t qualify for.
Learn More with Clarity
Our advisors can help you plan your finances for every tax season. Click here to schedule a consultation with Clarity Wealth today.