- Financial experts emphasize the importance of preparing for next year’s taxes early, especially if you encountered unexpected tax bills this season. Consider the following three smart strategies: reviewing your 2022 filing, assessing your withholdings, and reevaluating your portfolio.
- If you were taken by surprise with a tax bill this year, it’s never too early to start preparing for the coming year, according to financial experts.
As of April 14, the IRS has processed approximately 76 million refunds, with an average refund amount of $2,840. This figure indicates an 8.5% decrease compared to last year’s refunds at the same time.
Typically, a refund is issued when you have overpaid your taxes throughout the year, while a tax bill results from inadequate payments. Irrespective of your circumstances this season, it’s worthwhile to consider the following steps:
Evaluate your 2022 tax return
To comprehend why you faced an unexpected tax bill last year, the first step is to analyze the situation, for instance, differentiating between increased income due to a one-time event, like a substantial bonus, and recurring revenue from a successful side business is crucial.
If you fall into the latter category, you have ample time to make quarterly estimated tax payments or adjust your paycheck withholdings to minimize your tax liability for the following year.
Assess your withholdings
If you found yourself owing more taxes than anticipated in 2022, it would be prudent to reassess your paycheck withholdings for 2023 and make the necessary adjustments.
There are two options to reduce the number of allowances claimed or allocating a higher portion of each paycheck towards taxes. You can make these adjustments through Form W-4 provided by your employer.
“A straightforward calculation involves dividing the additional tax paid in 2022 by the number of remaining paychecks in 2023.
Reevaluate your investment portfolio
While it may not be at the forefront of your mind, now is an excellent time to review your investment portfolio.
Strategic asset placement becomes crucial if you hold three types of accounts: brokerage, tax-deferred, and tax-free. Since investments in brokerage accounts are taxable, pay closer attention to them.
For example, certain income-generating assets like bonds, specific mutual funds, or real estate investment trusts are more likely to result in a yearly tax bill within a brokerage account.
Nevertheless, if your earnings fall below a certain threshold, you might not owe taxes on your investments. For 2023, individuals with taxable income of $44,625 or lower, or $89,250 or less for married couples filing jointly, may qualify for the 0% long-term capital gains rate.