As with most things in life, it pays to stay prepared. When it comes to tax planning, getting active early could help you avoid making filing mistakes and paying for them in hefty fees or large year-end balances.  

Written by TLC’s in-house financial expert, LaTasha Young, our ultimate tax planning guide breaks down everything you should keep in mind about prepping for tax season — from itemizing your deductions to knowing when you should file.

1. Keep track of your expenses. 

For those that freelance or run their own business, it’s especially important that you keep track of your expenses retrospectively so that you’re not scrambling to find key documents at the end of the year. Like tax exemptions, deducting business expenses is a way to reduce or entirely eliminate your obligation to pay tax.

To stay organized, you could go the old school way and use a spreadsheet like Google Sheets or Excel. A more convenient way, however, is to use an app like QuickBooks or Xero, because they allow you to connect your banking information and upload store receipts — bot of which assist with tax preparation.

 Also, in the event of a tax audit, you’ll have everything handy to assist you.

2. Refer to your previous year’s tax return.

Taking a look at your old taxes will help you determine the likelihood of you owing a balance. Did you start a new business? Move for work? Did your income dramatically increase or decrease? If you anticipate a number of tax complications this year that you didn’t have last year, you may want to consult your CPA to avoid making filing mistakes.

3. Do a W-4 check.

At the beginning of the year, or when you first begin a new job, it’s important to ensure you’ve filled out your W-4 form (W-9 for independent contractors) with the correct filing status and number of exemptions. As Intuit puts it, “tax exemptions come in many forms, but one thing they all have in common is they either reduce or entirely eliminate your obligation to pay tax.”

To find out which exemptions you’re entitled to, click here!

4. Understand tax credits vs. tax deductions.

A tax credit reduces the amount of tax you owe, while a deduction reduces the amount of taxable income. Diving a little deeper, there are also two different types of tax credits you should know: refundable credits and non-refundable credits. Non-refundable credits (e.g. child and dependent care credit) reduce your tax liability but don’t result in a tax refund. On the other hand, refundable credits (e.g. earned income credit) can result in you receiving a refund from your local or federal government.

5. Identify your tax partner.

When it comes down to actually filing, you’ll need to decide whether you’d like to take a stab at it with an online service provider such as TurboTax or hire a local tax preparer/public accountant/etc. Depending on your situation, it’s usually more convenient to e-file.

 However, should you choose to file your taxes yourself, know there’s a few pros — and cons.

 Pros: You’d likely save money, gain peace of mind knowing you’ve accounted for all important info and learn more about your finances as well as available tax credits.

Cons: You’re also likely to spend additional time (which includes finding answers to your questions) and take on the risk of error.

6. If you’re running behind, file an extension.

The current deadline to file your 2020 taxes is April 15, 2021. If you anticipate you’ll need more time, an extension will help — but it’s important to note, you WON’T receive more time to pay any balance due. Instead, you’ll need to pay at least an estimated amount or set up a payment plan with your local or federal government.

7. When in doubt, call an accountant. 

If you have a complex tax situation, such as foreign income that needs to be accounted for or owning a business or having multiple investments, it’s best to seek out tax advice from an expert to avoid making filing mistakes.