The end of the year is always a busy time of year. While you may be focused on the upcoming holidays, it is also a good idea to run through your year-end tax planning checklist. As we prepare to close the book on 2021, there are a few key things to get in order to prepare for the upcoming tax season.
Year-End Tax Planning Basics
As the end of the year approaches it is important to start the process of closing out your financial year. This helps keep you organized for the upcoming tax season and allows you to properly forecast for the new year. As we inch closer to the new year, now is a good time to start organizing your financial documents, and assessing your income and expenses. Consider the deductions you are planning on claiming. Are there any purchases you can make before the end of the year that would benefit your tax situation? What about postponing income until the new year? Have you maxed out your IRA contributions? These are all important things to consider when running through your year-end tax planning checklist.
Your Year-End Tax Planning Checklist
A lot goes into preparing your taxes and forecasting for future business. It is important to meticulously scrutinize all aspects of your finances. This helps ensure accuracy, as well as allows you to claim all of the tax credits and tax deductions that are applicable to your business. Here are a few areas to focus on for your end-of-the-year tax planning checklist.
Gather and Organize Receipts
Expense tracking is a crucial part of your accounting process. Having a document trail is important to validate any deduction you credit you claim. In the event the IRS wants to take a deeper look, you will want to have proof to back up your claim. It is suggested that financial records are maintained for 7 years. Consider it an insurance policy against a potential IRS audit.
Expense tracking is best done as you go. This means ongoing filing and categorizing of receipts. There are a lot of programs available now that can make your expense tracking a lot easier. Many accounting software programs allow you to upload or email receipts as you go. The program then automatically categorizes the expense. The ability to have access to your accounting information on the go, also allows you to upload expenses at the time they occur, saving you time and keeping you organized.
Get Up to Date on Estimated Taxes
It is important to stay on top of your estimated taxes. These are tax payments you make on a quarterly basis. If you are self-employed or own your own business, then an employer is not withholding taxes for your pay. The IRS still wants to have these tax payments and so, estimated taxes are due.
Estimated tax payments are due: April 15, June 15, September 15, and January 15. As the 4th quarter is coming to a close, it is important to make sure you make your estimated tax payments on time before the January 15, deadline to avoid any necessary penalties or interest.
The easiest way to calculate estimated tax payments is to take the total amount in taxes you paid the previous year and divide that by 4. You can avoid a penalty by paying at least 90% of the current tax owed, or 100% of the previous year’s tax payment. Additionally, it is recommended to set aside 30% of your earnings in a tax savings account to cover your tax bill.
You can use the IRS payment center to process your estimated tax payments online.
Last-Minute Deductions
If you are like most taxpayers then you will want to save as much money as you can on your tax bill. One avenue to do this is with tax deductions. Tax deductions work to lower your taxable income thereby lowering your tax liability. Eligible deductible expenses are those that are deemed ordinary and necessary to your business. You have until December 31st to make eligible purchases. So, if you are looking for more deductions to lower your income, consider making a large purchase before the end of the year to reap the tax benefits for the current tax year.
You can also lower your taxable income by making contributions to your retirement accounts. The IRS allows you to deduct up to the maximum contribution limit of $6,000. This is an above-the-line deduction, meaning you can claim it even if you do not itemize. Additionally, you have until April 15 to make contributions for the prior year.
Perform a Bank Reconciliation
Staying on top of your books is crucial to seamless tax planning. Be sure to reconcile your accounts in a timely fashion. Failing to do so could lead to discrepancies between your bank accounts and your books. This can cause inaccuracies with your tax preparation, which in the end will lead to additional scrutiny and possible fines by the IRS. Plus, you will want to get all of the tax deductions and credits possible, inaccurate books can mean leaving money on the table and paying more than you should in taxes.
Analyze Your Bookkeeping Process
The start of a new tax year is a great time to evaluate your accounting process. The most important thing is that your accounting process is effective, efficient, and accurate. In addition, you don’t want a backlog of accounting tasks weighing you down. This can lead to miscalculations and inaccuracies and end up costing you in the long run. If you find your current system is less than functional, now is a good time to find a new strategy. Consider delegating or outsourcing your bookkeeping. Having an organized system will ensure that your tax season goes smoothly.
Get Professional Tax Planning Help
Having a tax expert on your side can help you with your year-end tax planning checklist. They may be able to advise on additional ways you can save on your taxes. Working with a tax advisor will also help you with any compliance issues and in the long run save you time, which is invaluable. For more tax planning tips, schedule a tax planning strategy session with a Shared Economy Tax expert today!