We get it—no one wants to think about taxes in summer. But if you start your tax prep now (especially if you’re a freelancer), you’ll be in great shape come April.
During the long, lazy days of summer, income tax is likely the last thing you want to think about. But the income you’re earning and decisions you’re making now will affect your tax bill next April—and spending a little time organizing and reflecting now can make the whole experience much easier at the end of the year.
“Mid-year is an excellent time to do tax planning, because you still have the opportunity to adjust your withholdings or estimated payments,” says Angela Radic, enrolled agent at Parker’s Tax Accounting in Gahanna, Ohio. “Also, if you’ve made any major changes, such as purchasing a home, getting married, having a child, or changing jobs, you’ll want to assess the impact to your return for this tax year.”
Here are five tax prep steps to take now to make filing your taxes easier and less painful next year.
- Get Organized
All year long you receive paperwork, and some of it will be needed to prepare your tax returns. If you haven’t been filing these documents away neatly, start now. If you have a pile of receipts in your home office, take a half hour now to get them organized before the size of the pile doubles by the end of the year. If you organize your data on a spreadsheet, Radic recommends conducting a mid-year update, so you don’t have as much to tackle at the end of the year. “It’s a good idea to document as you go, while things are fresh in your mind,” she says.
If you don’t have an organizing system in place, you can start with something simple. Consider using a large manila envelope, accordion file, or desk tray.
“The key is to pick a system in which you can easily file and then find documentation such as business expense receipts, medical bills, charitable deduction substantiation, and the like,” says Vanessa Borges, enrolled agent and tax prep supervisor at Tax Defense Network, LLC, in Jacksonville, Florida. “For many, the biggest hassle at tax time is getting all the documentation together. Maintaining your documents in an organized fashion will not only help you avoid missing valuable deductions to which you may be entitled, but will also help ensure that your income tax return is complete and accurate.”
- Revisit Your Withholding
If you received a large tax refund this year and your work and tax circumstances haven’t changed much, you should probably adjust your withholding so you won’t get a big tax refund next year. Although some people view tax refunds as “forced savings accounts,” that’s not really a good idea because it means the government, rather than you, has control of your money for a year, Borges says. If you have control of your own money, you can be using it throughout the year to meet your financial goals, rather than allowing Uncle Sam to use it and then return it to you.
“The ideal payroll withholding situation is to have just enough tax—not too much, not too little—withheld from your paychecks to meet your eventual annual tax bill,” Borges says. “In this way, you’ll avoid writing the U.S. Treasury a check for tax due if you under-withheld. And if you over-withheld, you won’t be waiting for a refund check.” If you need to change your withholding, simply submit a new W-4 to your payroll department.
- Consider Estimated Taxes
If you receive income that isn’t subject to withholding—such as through freelance or contract work or a side business, you’re required to submit estimated tax payments throughout the year. That’s how the IRS ensures that you pay as you earn on all your income. And when you make quarterly estimated tax payments, you can make sure you don’t underpay your taxes. (If you owe too much at filing time, you could face a tax penalty.)
“Summer’s a great time to reassess your estimated tax situation,” Borges says. “Look at what you’ve paid via your April and June 1040-ES filings and see whether your schedule is still on track. If not, you can adjust your upcoming September and January estimated tax payments.”
- Make Charitable Donations
At the end of the year, many people think about contributing to charity to spread holiday cheer and get a tax deduction before December 31. But “your favorite nonprofit organization will happily take your money or unwanted household items any time of the year, and summer is when many charities are struggling, as most folks tend to spend this season thinking about their own recreational wants instead of other people’s needs,” Borges says.
So right now can be a good time to donate to the charities of your choice, helping them out now and ensuring a tax deduction for you later. Just make sure to get a receipt: “The IRS now demands documentation for every monetary charitable gift, regardless of how small or large,” Borges says. “Without it, the IRS could disallow your deduction.”
- Consult a Professional
If your earnings have changed or you’ve purchased a home, gotten married, or expanded your family, your tax situation will be different from last year. If it’s gotten too complex for you to prepare your own return, you may want to consult with a tax professional, such as a CPA or enrolled agent, now rather than waiting. “Tax professionals are more likely to offer consultation and planning appointments prior to the start of tax season,” Radic says.
Freelance journalist Nancy Mann Jackson writes regularly about personal finance, small business, health care, and education. Her work has appeared in Entrepreneur, CNNMoney.com, Bankrate, Working Mother, and many other publications. She lives in Alabama with her husband and their three boys.
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While Society of Grownups hopes the information is useful, it’s only intended to provide general education. It’s not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need recommendations geared to your personal financial situation, schedule time with a financial planner.