How to prepare for tax season

Tax tips to help you take charge of your finances

Tax season is back. Once again, the time has come to collect important documents and present the findings to Uncle Sam. Sometimes, filing your tax return can feel like spinning a wheel in a game show. The dial could land on a tax refund, a bill for additional taxes owed or the seemingly impossible-to-hit category of "breaking even," meaning you withheld enough and didn't overpay.

While the tax code can be difficult to understand and moving pieces can impact your finances in different ways each year, taxes aren't as unpredictable as they can sometimes feel.

Read on for nine actions you can take during tax season and throughout the year to destress the tax process and shore up your finances at the same time.

1. Keep good records.

Filing your tax return is much easier when all your necessary documents are organized. If you store necessary tax documents throughout the year in an easy-to-access location, you’ll have everything you need when the time comes.

Examples of documents include W-2s, 1099s, health care coverage forms, charitable donation receipts, expense tracking and mileage records.

Also, consider this strategy this year: When you file your taxes, make a checklist of all the forms you ended up collecting and save that list for next year. Then you can check those forms off as you collect them.

2. Review your prior year expenses and other financial activity.

Take the time to review your past year's expenses. Were there any changes? Did your family grow? Did you move? All these events could come with expenses that impact your tax situation, potentially saving you money. 

If you experienced a unique event, like student loan forgiveness, you might owe taxes on the amount forgiven. Certain types of loan forgiveness may be taxable, while others, such as Public Service Loan Forgiveness, are generally excluded from federal taxable income. Tax treatment depends on the forgiveness program and current tax law.‍ ‍

Taxes aside, taking a closer look at your spending habits can be eye-opening. For example, spending $20 a month on a streaming service may not seem like much. But if you have multiple subscriptions, the total can quickly become a motivator to cut back.

Once you have that visibility, a budget can help you turn insights into action, allowing you to plan for the unexpected and make more intentional financial decisions. If you need support, consider using a mobile app, budgeting tool or other budgeting resources.

3. Boost savings to support your goals and lower your tax burden.

While not always an indicator of the future, your past spending can help you project where your money is going in the coming year. Look for ways to save monthly for future goals like your retirement or your kids' education and be sure you've saved funds for emergencies. In fact, tax time can be a great time to build your emergency fund because you can use your tax refund to jumpstart your emergency savings. You might also use it to prioritize your savings by opening up a dedicated savings account.

As you look for places to cut spending, there may be ways you can use the cash you’ve freed up to reduce your tax burden. Making annual contributions to pre-tax retirement plans such as a 401(k), 403(b) or Thrift Savings Plan, or TSP, can help reduce your current tax liabilities and increase the resources you may have when you no longer want to work. Doing so lets your money grow on a tax-deferred basis, meaning you won't pay taxes on the growth within your plan year-over-year, but you will pay tax on distributions. You may also pay a tax penalty if you take distributions before age 59½.

If you can't deduct your contributions to an IRA, you may want to consider making contributions to a Roth IRA, if eligible. In some cases, you might want to consider a Roth IRA even if you are eligible to deduct contributions. A Roth IRA provides a tax break in the future because your money can grow tax-free, and qualified withdrawals are tax-free. To determine which is right for you, it’s important to understand the differences between a Roth and traditional IRA.

If you are covered by a high-deductible health plan, or HDHP, you may be eligible to contribute to a health savings account, or HSA. HSAs typically offer various options to grow the money you contribute, and your contributions typically reduce your current income, giving you a break on your taxes. When you use the funds in your account for qualified medical expenses, your distributions are typically tax-free.

In general, individuals covered by TRICARE are not eligible to make HSA contributions because TRICARE is not a qualifying high-deductible health plan.

4. Consider how inflation affects your taxes.

The dark cloud of inflation can act like a hidden expense in your budget, as it eats away at your purchasing power over time. However, there's a silver lining to this cloud.

Our tax system and Social Security typically make provisions for inflation. For example, the standard deduction and tax brackets could both increase from year to year to help offset the effect of inflation.

Those receiving Social Security usually begin to watch the news around October. Why? They’re waiting to find out if the Social Security Administration will announce a cost-of-living adjustment for the next year. One more way to help combat inflation.

Changes in the tax brackets, deduction amounts and income all affect what your tax rate can be. Run the numbers as early as possible to be prepared.

5. Decide whether to take the standard deduction or itemize.

Choosing between the standard deduction and itemizing is an important step when preparing your taxes.

The Tax Cuts and Jobs Act, or TCJA, of 2017 significantly increased the standard deduction and changed which expenses could be itemized. Recent legislation, the One Big Beautiful Bill Act, or the OBBBA, made some of those changes permanent, including the higher standard deduction and other temporary provisions such as the enhanced senior deduction.

To decide what’s right for you, start by reviewing your deductible expenses over the past year. If your total eligible deductions don’t exceed the standard deduction for your filing status, itemizing likely won’t provide additional tax savings.

Keep in mind that tax software can do this comparison for you automatically, but it’s still helpful to understand how the decision is made.

Here are some common deductions, credits and exclusions to review:

Itemized deductions

• Mortgage interest
• Charitable contributions
• Qualified unreimbursed medical expenses that exceed 7.5% of your adjusted gross income

Adjustments to income (if eligible)

• Student loan interest
• Unreimbursed military moving expenses related to a permanent change of station (PCS), if eligible

Tax credits

• Child and Dependent Care Credit
• Lifetime Learning Credit
• Premium Tax Credit for eligible ACA Marketplace coverage

Income exclusions and other tax considerations

• Gain from the sale of a primary residence, if IRS ownership and use requirements are met
• Capital losses may be used to offset capital gains and, subject to IRS limits, certain ordinary income

Review IRS guidance to determine whether a specific expense or tax provision applies to your situation.

6. Consult with an expert if you need help with taxes.

As your tax situation gets more complex, bring in an expert. A reputable professional can offer guidance unique to your financial situation.