Tax season comes around quickly every year and, before you know it, it’s time to put your documents together and get your taxes filed. Whether you’re working on everything yourself or getting help from a professional, preparing early is the key to a less stressful tax season.
Not sure where to start? We’re here to give you all the details to consider as you prepare for tax season in Texas, from the essentials to types of tax breaks that could save you money this year.
How to Prepare for Tax Season Each Year
While filing your taxes may only come around once a year, preparing for tax season should be an ongoing task. This is especially true if you’re working in an untraditional setting as a contractor or running a side business. There are literally thousands of IRS tax forms, so you should spend some time throughout the year familiarizing yourself with what you’ll need come tax time.
For example, most traditionally employed individuals will receive a W2 form from their workplace that outlines the taxes that have been withheld from your paycheck throughout the year. But if you’re working for yourself, or have additional income from outside of your job, there are other forms that you’ll need to provide.
Work like social media influencing, running a small business, or receiving rent payments from properties that you own all give you extra income that isn’t taxed upon receipt. That means that you’ll also need to file a 1099-MISC or 1099-NEC to declare these earnings and pay tax on them. If you’ve paid any estimated taxes throughout the year on your self-employment income, be sure to have records of how much you paid and when.
You’ll also want to gather any of these documents for your dependents or spouse who will also be on your tax return. Save any documents or receipts over the year in a safe place if you think that they could be eligible deductible items. Particularly if you’re running a business, keeping a record of your expenses will help to lower your taxable income.
When thinking about how to prepare your taxes, take a look at your last year’s filing. Determine if your status might have changed e.g. did you get married in the last 12 months or have a child? Did one of your children leave home and are no longer a dependent on your return? All of these factors can play a huge role in how much you owe in taxes each year, so it’s vital that you consider any big life events before you file.
Another important preparation tactic is to max out your retirement savings accounts for the year if you’re able to do so. Look carefully at your budget to see where you can find those extra funds. Like business expenses, maxing out a retirement plan contribution for the calendar year will reduce the amount of tax that you owe.
Once you have all of your necessary paperwork in place, it’s time to decide how you’re going to actually file your taxes. Most business owners or individuals making money outside of traditional employment will likely want to use a CPA or accountant to help maximize appropriate deductions and fill out the correct forms. But for those who only work in W2 positions, filing yourself using software like TurboTax or working with a tax service like H&R Block will often be enough.
Tax scams are rife at this time of year, so stay alert for phishing attempts as we get closer to the tax filing deadline. Only provide reputable and verifiable tax services with your financial information and remember that they will never reach out via phone or email to request access to your personal details.
Texas-Specific Tax Credits and Deductions to Know About
When it comes to tax credits, Texas business owners can benefit from incentives like the Texas Enterprise Fund. This offers cash grants to businesses that provide significant job creation and capital investment in the state. The Skills Development Fund also provides grants to businesses working with local colleges or technical schools to help train new and existing employees.
If you’re using a tax filing service in Houston, Austin, or Dallas and operate a business in the city, ask your CPA about the localized tax credits that you could be eligible for. For instance, Houston’s LEED incentive can provide energy and environmental design certifications, and subsequent tax credits, to businesses who create efficient and cost-saving green buildings in the city. Additional credits may also be available for businesses operating with solar or wind energy.
Texas state tax deductions can also be applicable to individuals without a business. As one of the nine states that doesn’t require personal income tax, one of the biggest tax deductions for Texas residents is usually property tax exemptions. Veterans, senior citizens, individuals with disabilities, and charitable organizations may all be eligible for tax breaks on the properties that they own.
For employed individuals, costs relating to your job function such as travel, training, clothing, or union dues are often deductible expenses that are overlooked. If you spent time searching for a new job this year, you can even deduct travel and phone call costs for interviews, along with the cost of printing and posting your resume.
Additional Overlooked Tax Credits and Deductions
1. Moving Expenses
Federal moving credits expired for most people in 2018, but active-duty military personnel are still eligible. Moving expenses can be considered deductible if the move is considered to be permanent and your relocation was ordered by the military.
2. Reinvested Dividends
While not strictly a tax deduction, investors who have mutual fund dividends that automatically invest into additional shares can subtract these funds from their taxable income. This means that you’ll be reducing your taxable capital gain when you sell your shares.
3. Child & Dependent Care Tax Credits
Thanks to the American Rescue Plan, if you’ve spent up to $8,000 in caring for a child or dependent, or up to $16,000 for two or more, during 2021, you could be eligible for a tax credit. Unlike previous tax years, you will still be eligible for this credit, even if you don’t owe any taxes.
4. Education and Lifetime Learning Credits
The Lifetime Learning credit can provide you with up to a maximum of $2,000 in tax credits for the first $10,000 in tuition expenses paid in a single year. The credit is available for individuals in education, their spouses, or dependents.
5. Educator Expenses
For teachers, instructors, counselors, principles, or even classroom aides, the Educator Expense deduction allows you to deduct up to $250 of unreimbursed expenses for equipment used in the classroom.
6. Student Loan Interest
If you’ve been paying interest on your student loans, you’ll be able to write that amount off as a tax deduction whether the interest has been paid by you, your parents, or someone else. This likely won’t be applicable to most people for the 2021 tax filing thanks to the freeze on federal student loan interest and repayments during the pandemic. But this is certainly one to keep an eye on for future years.
7. Refinancing Mortgage Points
When you’re thinking about mortgage refinancing, reviewing the possible tax savings is important to consider. You could be in a position to deduct points paid to obtain your mortgage over the lifetime of the newly refinanced loan (e.g. 15 or 30 years), rather than only being able to deduct them during the tax year that you took out the loan.
Prepare Early to Maximize Your Savings
There are plenty of ways to stay on track with your tax preparation and financial planning in Texas. If you need help filing your taxes or planning for the future, talk to a Moody Bank lender today. We can also help with personal savings accounts, business finances, and more so that when tax season comes around, you’re well organized and ready to file. Contact Moody Bank to get started.