Yesterday the IRS issued a news release that contained guidance for taxpayers on how to prepare for the 2022 filing season. Too soon? Hard nope. After two of the worst filing seasons on record, tax professionals are predicting another chaos-filled season in 2022. Many taxpayers are still working remotely in states (or countries) other than where their job is located, creating state tax return issues. Economic impact payments (EIPs) and advance payments of the child tax credit (CTC) will need to be reconciled on 2021 returns. The reconciliation bill that has been being hashed out by the House for months could even include retroactive tax provisions that pass late this year or worse, during filing season (again). Nevertheless, taking the following actions right now will help to ensure that you get all of the tax benefits to which you are entitled and will help to make return preparation smoother whether you use a tax professional or do it yourself.
1) Watch for your documents.
Put a reminder in your calendar for January to start looking for your tax documents—including documents that don’t look like documents (e.g., acknowledgments of charitable contributions and tithing). From the IRS, watch for Letter 6419, which will provide information on advance payments of the CTC and Letter 6745, which will provide information on the third round of EIPs. And remember, it’s only Round 3 EIPs that get reported on the 2021 tax return. The two earlier payments, even though the second payment came in early 2021, should have been reported on your 2020 tax return.
Log into your online bank and brokerage accounts (including online accounts like Robinhood) to look for tax documents. If you aren’t an active user of your accounts, now is a great time to do a trial run to ensure your login information is accurate, that you remember your password or to reset your password, and to figure out where on the site your tax documents will be placed when they are ready for download. If you itemize your deductions (or think you may be able to itemize) do the same for your medical practitioner and pharmacy accounts. Often you can obtain account summaries from these accounts that are much easier to use and more accurate than adding up individual receipts.
2) Catch up on your books and records.
Self-employed taxpayers who do their own books should take some time during November and December to catch up on their record keeping. Don’t wait until January (or later) to figure out your annual business income and expenses. Spending some time on this task each week starting now will be much easier than madly scrambling to do a full year’s worth of record keeping after procrastinating your way through the holidays. Additionally, the earlier in tax filing season you can submit this information to your tax professional, the more likely you are to get a quick turnaround on your return preparation. If you self prepare your return, knowing you don’t have to tackle your record keeping in addition to your return can be extraordinarily motivating.
Individual taxpayers who have cryptocurrency should update their records of purchases, transfers, sales, etc. and be prepared to provide this information to their tax professional or to report sales and other transactions on a self-prepared return.
3) Make year end charitable donations and business purchases.
Taxpayers who take the standard deduction can still take an “above the line” adjustment of up to $300 ($600 for jointly filed returns) of cash donations this year. Be sure to save your receipt or acknowledgment letter (see Item 1, above). This line item may be receiving IRS scrutiny in the future so taxpayers making the adjustment should be prepared to substantiate it. Of course, taxpayers who itemize their deductions can still deduct their charitable contributions and also should always be prepared to substantiate them.
Between now and the end of the year tax expect to see dozens of articles with “last minute tax tips.” Experienced tax professionals are aware of these tips and don’t need to be reminded. But if you do your own taxes, these articles can be helpful. It is important, however, to also remember that it is not generally wise to spend money to save money on taxes. In other words, make the charitable contributions you would normally make or want to make. Make business purchases that help you meet your business goals. Don’t go on a frantic buying spree to lower your profits just because you don’t want to pay taxes on the profits. When it comes to business, profits (even taxable profits) are always better than losses.
4) Get an online account with the IRS.
Taxpayers with internet access and a cell phone should consider signing up for an online account with the IRS. The online account is the easiest way to check amounts of CTCs and EIPs. Taxpayers can even pull account and other transcripts that may help with preparing their returns.
5) Find a tax professional.
In 2022 it may be harder to find a tax professional and it will probably be more expensive. Many tax professionals have retired, while others have decided to reduce the volume of returns they prepare each season because anymore there’s no such thing as a “simple” tax return. Right now many tax professionals are taking a well-deserved break, catching up on continuing education, fine tuning their practices for next filing season, and—looking for new clients. Come January, tax professionals whose practices include accounting services will be busy closing out the 2021 books for their business clients. Waiting until March (or worse, April) to find a tax professional pretty much ensures that you will have fewer options and, most likely, higher prices. If you are looking for a long-term relationship with a trusted tax professional, it’s best to start shopping for one now.