Tax season is often met with a sense of dread, and it’s no wonder why. The complexities and nuances of tax preparation can be overwhelming. However, having a solid plan in place can significantly impact your overall financial strategy and retirement plans. Here are some essential steps to help you prepare for tax season and ensure your financial strategy is aligned.
Gather all necessary documents
Begin by collecting all the required documents. For income, ensure you have W-2 forms from employers and 1099 forms for other income sources, including digital asset transactions like cryptocurrency. If you’re self-employed, gather invoices, receipts, mileage logs, a profit/loss statement, and records of any estimated tax payments. For deductions, keep documents related to education expenses (Forms 1098-T and 1098-E), child care costs, homeownership (Form 1098 and property tax records), charitable donations, health insurance (Form 1095-A), medical expenses and retirement contributions.
Know your filing status
Your tax filing status is a critical factor as it influences your standard deduction, tax brackets, filing requirements, and eligibility for certain tax credits. Whether you are single, married, head of household, or another status, knowing your filing status will guide your tax strategy.
Consider tax implications of life changes
Major life events can bring significant changes to your tax situation. Whether you’ve gotten married, had a baby, retired, or bought a home, each event can affect your filing status, deductions and credits. For instance, marriage may change your filing status and credit eligibility, while a new baby could qualify you for child tax credits and dependent care credits. A home purchase may allow you to claim mortgage interest and property tax deductions.
Maximize contributions
If you haven’t maximized your retirement contributions for the year, consider increasing your contributions before the deadline. For example, 401(k) plans allow annual contributions of up to $23,500, with an additional catch-up contribution of $7,500 for those aged 50 and older. Notably, if you turn 60, 61, 62, or 63 in 2025, the catch-up contribution increases to $11,250. SIMPLE IRAs allow contributions of up to $16,500 annually, with an additional catch-up contribution of $3,500 for those 50 or older, increasing to $5,250 for ages 60-63. Maximizing these contributions can reduce your taxable income and enhance your retirement savings.
Retirement planning
If you’re preparing for retirement or are already retired, it’s important to consider your contribution limits for Traditional and Roth IRAs. These accounts have a contribution maximum of $7,000 annually, with an additional $1,000 catch-up contribution if you’re 50 or older. You have until April 15, 2026, to make a 2025 contribution.
If you or your spouse participate in a qualified employer plan, there are AGI phaseouts that may affect your eligibility to contribute or take a deduction. Before filing your tax return, consult with your accountant or advisor to determine your eligibility and contribution limits.
Consider Roth conversions if you expect higher income in retirement. Converting to a Roth IRA can help manage your overall tax burden, but remember that conversions are irreversible, and you’ll need to pay taxes associated with the conversion. Additionally, a Roth conversion increases your Modified Adjusted Gross Income (MAGI), which can impact your SALT deduction cap.
Consult with a professional
Meeting with a CPA or a trusted professional can be invaluable. They can help ensure you’re taking advantage of all available deductions and credits and that your tax strategy aligns with your overall financial plan.
By taking these steps, you can better navigate tax season and positively impact your financial health and retirement readiness. Remember, a proactive approach to taxes is a key component of a successful financial strategy. Planning ahead and seeking the right guidance can make all the difference, transforming tax season from a dreaded task into an opportunity for financial growth.
Seth Pals is a financial advisor at Northwestern Mutual. This article is not intended as legal or tax advice. Financial representatives do not render tax advice. Consult with a tax professional for advice that is specific to your situation.
