Preparing for Tax Season: Essential Steps

As tax season approaches, many people often feel rushed, like they’re in a sprint rather than a long-distance run. With your W2 forms arriving in late January, you’re suddenly faced with the task of sifting through a chaotic box of receipts over a stressful weekend to piece together your tax return. This annual obligation can often feel overwhelming and stressful, creating a sense of dread.

But what if the experience of filing your taxes could be much more manageable?

The key to alleviating the stress of tax season lies in early preparation. It’s best to start tackling this now. For a smoother tax filing experience, here’s what you can do ahead of time.

Create a list of necessary documents

One of the most aggravating experiences during tax preparation is realizing you’re still missing a crucial document after you’ve collected what you thought was everything. It’s even more frustrating when you’re unsure how to locate the missing information.

Take the time now to compile a list of the documents you’ll need to file your taxes, allowing ample time to gather all necessary items well before Tax Day. Specifically, you will require:

A copy of your previous year’s tax return
The Social Security or Tax ID number for every member of your household
Income statements for all household members
Receipts for any deductible expenses
Records of taxes paid during the year

Creating a comprehensive list and checking off each item as you collect it ensures that you’re ready when it comes time to file. (See also: Answers to the 7 Most Common Tax Questions for Beginners)

Sort your receipts

Tracking tax-related receipts throughout the year can be challenging. Often, individuals accumulate receipts for work expenses, charitable donations, medical costs, mortgage payments, and interest statements in a single pile to sort out “later.”

Now is a perfect opportunity to locate your receipts and begin organizing them by category. By having your receipts neatly categorized now, it will be easier to handle the final few that trickle in as the year wraps up, and it also helps you develop the habit of filing them promptly.

Compile your paystubs

While most taxpayers receive a W2 or 1099 form from their employers, it’s wise to gather your paystubs before the year’s end to get an approximate sense of your income. This proactive step allows you to identify any discrepancies on your W2 or 1099 forms once they arrive, preventing the last-minute scramble for corrections as the IRS deadline approaches.

Moreover, reviewing your paystubs collectively allows you to examine your federal and state tax withholdings throughout the year, in addition to any pretax contributions made to a 401(k) or IRA.

Assess your W4

Taking a moment to look over your paystubs provides an opportunity to revisit your W4 with your employer.

The W4 form dictates the amount of tax withholding deducted from each paycheck. If you anticipate a substantial refund this year, you can modify your withholding allowances now to ensure you retain more of your pay throughout 2020. Conversely, if you’re concerned about potentially owing money due to insufficient withholdings, this is the perfect time to revise your W4 to avoid encountering the same issue next year. (See also: Are You Withholding the Correct Amount of Taxes from Your Paychecks?)

Contribute more to your retirement savings

If you can access a tax-deferred retirement plan such as a 401(k) or IRA, now is the time to evaluate your contributions for the year and consider increasing them.

In 2019, individuals under 50 can contribute up to $19,000 to a 401(k) and up to $6,000 to an IRA. Each dollar contributed to these accounts lowers your taxable income.

Now is a good moment to maximize your 2019 contributions. You have until the end of the calendar year to reach your contribution limit for a 401(k), while you can continue to contribute to an IRA until April 15, 2020.

Establishing the habit of increasing your contributions now can set you up to reach the maximum in 2020, which increases to $19,500 for 401(k) accounts, although the IRA limit remains at $6,000. (See also: 8 Common Tax Return Mistakes Even Smart Individuals Make)

Strategize for your potential refund

If you anticipate receiving a refund, now is the time to contemplate how best to use that money. Many tend to view tax refunds as “found money” when in reality, it’s simply your earnings being returned to you. This mindset can lead to impulsive spending—like on vacations or electronics—once the funds arrive.

While treating yourself is perfectly fine, taking the time now to analyze your budget and financial situation can help you determine if spending your refund is the best choice. Could you pay off existing debt or invest toward significant goals like a home down payment instead?

By thinking ahead about the best allocation of your tax refund, you increase the likelihood of making wise decisions when the funds are in your possession. It’s easy to lose focus once the money is in hand, leading to spontaneous spending rather than saving.

Reduce tax season anxiety

By getting a head start on your tax-related tasks, you can significantly ease the stress of tax season and set yourself up for financial success in the upcoming year. Begin 2020 on solid financial ground by initiating your tax preparation early.