As Benjamin Franklin said “in this world, nothing is certain except death and taxes.”
Death only occurs once in a lifetime and hopefully not this year. However, taxes come annually, and so 2024 most definitely brought an annual tax filing deadline. The 2024 tax season officially started on January 29, 2024, according to the Internal Revenue Service (IRS). That is the date the IRS started accepting and processing returns for the 2023 tax year. The IRS expects more than 128.7 million individual tax returns will be filed by the April 15, 2024, tax deadline.
What is known as a certainty to be prepared for has become a stressor that fosters procrastination. When we procrastinate, we just make the situation worse by putting off the inevitable. According to a recent survey by the Chamber of Commerce, 30% of Americans procrastinate and wait until the last minute to file their taxes. And when they finally do get around to filing, 50% of Americans admit to rushing through the process to complete their taxes as quickly as possible. Top reasons for avoidance include: it’s complicated, it’s stressful, and it’s time consuming. While true, you can combat these challenges through careful planning, organization, and implementing stress-management strategies. Consider these ways to make the tax filing process easier and reduce your stress in the process.
Start Early: Begin organizing your tax documents as early as possible. If you claim deductions, you can gather that information way in advance of tax preparation time. For example, keep records of annual donations, professional association dues, and medical bills, and keep a running tally of amounts spent as you pay them. Come January, you won’t have to dig around for receipts and old credit card statements, you’ll already have a list of what you spent. Then, compare this to your annual credit card statement to ensure you did not miss any deductions. Most employers, banks, and other entities that send you tax reporting documents send out those documents in January. Don’t let them sit in the mail pile; start filing them as soon as you get them.
Be Organized: Save all your documents in one place. Paper documents can be filed in a physical folder or added to a digital file. Doing both is probably your safest bet. Either way, you’ll be ready with your supporting documents for filing.
Budget for Taxes: You can alleviate financial stress by planning for your tax liability throughout the year. Pay your quarterly taxes and set aside money regularly so you can be prepared when tax season comes.
Use Technology: The IRS offers tools to assist you in filing your taxes. There is alternative tax software and online platforms to simplify the filing process. In addition, tax preparers are finding ways to improve efficiency and security for their clients, leading to some technology shifts in the taxation industry.
Understand the Basics: Don’t let the unknown stress you out. There are an overwhelming number of tax laws. While you will never know them all, you can familiarize yourself with the tax filing process, the forms you need, the records you will be required to provide, and applicable deductions.
Taxpayers can obtain guidance on tax compliance in clear, ordinary language free on the IRS website. The site provides an interactive tax assistant search, answers to frequently asked questions and explanations of tax topics in clear language.
Stay Informed: The tax laws are ever changing. We are not tax attorneys and do not know the full breadth of all the changes this year. However, we can highlight a few relevant ones here. Of particular note:
- standard deductions and tax brackets, including the capital gains tax brackets, increased by approximately 7%
- the annual exclusion for gifts increased to $17,000 in 2023, up from $16,000 in 2022
- the Earned Income Tax Credit increased from a maximum of $6,935 in 2022 to a maximum of $7,430 in 2023
- the new IRS limit for FSA contributions for 2023 is $3,050, an increase from last year’s threshold of $2,850
- standard deductions and tax brackets will increase by roughly 5.4% for inflation
- the annual exclusion for gifts will increase another $1,000 to $18,000
- the Earned Income Tax Credit will increase again to a maximum of $7,830
- the new limits for FSA contributions will increase to $3,200 and will allow taxpayers to carryover up to $640 into the next year
- contribution limits for retirement plans will increase $500
Don’t Forget About Capital Gains Tax: We all like to see the stock market go up, but do not forget that you will be taxed on the profit you earn from the sale of your stock. Short-term gains (earned on investments held for less than a year) are taxed at an individual’s regular income tax rate. Long-term gains (earned on investments held for over a year) are taxed between 0-20% depending on the taxpayer’s tax bracket for that year. Investors are incentivized to hold investments for more than a year because short-term gains are taxed at a higher rate.
One way to avoid paying taxes on stock sales is to sell your shares at a loss. Although no one wants to lose money, losses you incur from selling stocks can be used to offset any profits you made from selling other stocks during the year. If your total capital losses exceed your total capital gains for the year, you can deduct up to $3,000 of the losses against your total income for the year and carry over any additional losses into the following tax year.
Get Professional Help: If your tax situation is complex, consider hiring a tax professional. They can guide you through the process, keep you on track for timely filing, and perhaps even reduce your stress levels.
We are not tax attorneys. The information provided here is for general purposes only and should not be considered as legal, financial, tax, or investment advice. If you need tax advice, you should seek the assistance of a professional tax advisor.