December 20, 2022 | Article | 5 min Personal insights
Check out these actionable strategies to coordinate your estate and tax planning documents—and minimize your 2022 tax liability.
Let’s dive into some actionable strategies to consider over the next several weeks to coordinate your documents and minimize your 2022 tax liability.
File Your Taxes Online Instead of by Mail
Shopping, dating, ordering takeout—you can do practically anything online these days, including filing your taxes. But while filing online is significantly easier, is it better? Let’s unpack the overwhelming advantages of online filing and why this should be integral to your estate and tax planning strategy.
You’ll receive near-immediate confirmation that the IRS received your paperwork once you finish filing your taxes online. If they notice a discrepancy, your authorized e-filer (be it Turbo-Tax or H&R Block) must attempt to contact you within 24 hours with an explanation. They’ll tell you what triggered the flag, allowing you to fix the issue immediately.
E-filing is much safer than paper filing, for obvious reasons. Think about how often you send a check in the mail these days when it’s easier—and safer—to initiate an online transfer. Why wouldn’t you apply the same logic to your taxes? According to the IRS, e-filers meet strict security guidelines, ensuring that your sensitive information is protected via modern encryption technology.
You and the IRS agent processing your taxes will make fewer errors when you file online. They won’t have to enter your information line-by-line into the system, which also speeds up processing.
Check Your Online Payment Options
Ideally, the government will owe you money after you file your taxes. But, if you end up with a tax bill, you have several online means to pay it. Here are some of the most popular options.
An EFW, or an Electronic Funds Withdrawal, comes from your checking or savings account. When you file online—either through the IRS Free File or your preferred tax-prep program—you’ll be able to enter your banking information to pay your tax bill. Aside from any associated fees from your bank, this method of paying your tax bill is free.
IRS Direct Pay
Like an EFW, you’ll visit the IRS Direct Pay website, enter your information, and authorize them to withdraw from your bank. This method is also free and allows you to schedule payments a year in advance. You can even change or cancel payments up to 48 hours before the scheduled date. The only downside to IRS Direct Pay is that you cannot make business payments with this method.
The Electronic Federal Tax Payment System (EFTPS)
This may be the better option if you’re paying business taxes. You’ll log onto the IRS EFTPS website and provide the necessary information. They’ll send a PIN by mail in about a week. You’ll go back online, enter your PIN, set a password, and then authorize an ACH transfer from your account. The EFTPS method is also free of charge.
Credit Cards, Debit Cards, and Wire Transfers
You can always pay your taxes via credit card or wire transfer. However, these methods come with associated fees—upwards of $25 for wire transfers. You could also accrue significant interest on your credit card if you don’t pay the balance before the next billing cycle.
Paying with a debit card also sends your information through a third party. So, if security is important to you, EFW Withdraws and IRS Direct Pay are better options.
Documentation Is the Key to a Smoother Process
Proper organization is key when estate and tax planning. Ensure you track all possible deductions, like mileage, donations, and business expenses throughout the year. You may lean on paper receipts and filing cabinets to track all this information—but a plethora of easy-to-use apps make digital document storage the better option.
You can scan or take pictures of paper receipts as a backup option. However, we all know how easy it is to lose or misplace a vital piece of paper.
All of this documentation will be necessary when claiming deductions The information you enter on your tax return must match your official records. You’ll need to provide this information to the IRS if you get audited. Audits aside, you’re only making your job more challenging when you don’t keep accurate records of all your business expenses and possible deductibles.
Accurate records help distinguish taxable income from non-taxable income and keep track of business vs. non-business expenses. You wouldn’t want to pay on non-taxable income or miss a hefty deductible because of poor record keeping, would you?
Additionally, accurate records are crucial for preparing your financial statements. These include your income statements (profits vs. loss) and balance sheets (assets, liabilities, and business equity).
Maximize All Ways to Minimize Your Taxable Income
The primary goal of proper estate and tax planning is to pay as little as legally required. When we say “minimize your taxable income,” we don’t mean “make less money.” We mean to minimize the amount of reportable income upon which your taxes due are based.
Let’s uncover some strategic ways to lower your tax bill without taking a pay cut.
Understand Tax Credits vs. Tax Deductions
Understanding the difference between credits and deductions is crucial during tax season. Tax credits are dollar-for-dollar reductions on your tax bill. The Child or Dependent Care Credit is a common example.
Tax deductions simply reduce your overall taxable income. For example, if you spent $100,000 on your business this year, you can deduct that from your taxable income. Ensure you have the proper documentation to back this deduction up.
There’s a seemingly infinite and ever-changing amount of credits and deductions that may apply to you anytime. It’s best to seek the advice of a trusted financial partner to see which applies to your 2022 taxes.
Contribute to a Retirement Account
If you haven't maxed out your accounts, contributing to a tax-deferred 401(k), Roth IRA, or traditional IRA can lower your taxable income. This can save you money today and in the long run. You might find yourself in a lower tax bracket during retirement, thus paying less when you finally withdraw that money (much less than you would today).
Leverage Flexible Spending Accounts (FSAs)
Flexible Spending Accounts are employer-sponsored benefits that allow you to pay for certain expenses (like dependent care, medical bills, and health insurance) with tax-free funds. Your employer will deduct a tax-exempt percentage of your paycheck and place it in your FSA. Then, when those expenses pop up, you can use the money in your FSA to cover them. If you have to spend that money, you might as well not pay taxes on it.
Start Planning Today With New Mexico Bank & Trust
Don’t wait until March to begin estate and tax planning for this year’s taxes. Spend the year’s end gathering all the necessary documentation, including business expenses, statements, and receipts. Consider all the available means of filing and paying your tax bill online—and lean on a trusted financial partner, like New Mexico Bank & Trust, to answer any convoluted questions.
Get in touch with New Mexico Bank & Trust to speak with a trusted financial partner with deep tax code knowledge. Together, you can build an estate and tax planning strategy to prepare you for the upcoming tax season.
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