After Tax Day: Take These Two Action Steps

The April tax filing deadline has passed, but that doesn’t mean you should push your taxes out of your mind until next year. Here are two tax-related actions that you should consider taking in the near term:

Retain the Requisite Records

Depending on the specific issue, the IRS has years to audit your tax return so it’s critical to maintain the records you may need to defend yourself. You generally need to keep the documents that support your income, deductions and credits for at least three years after the tax-filing deadline. (Note that no time limit applies to how long the IRS has to pursue taxpayers who don’t file or file fraudulent returns.) Essential documentation to retain may include: Form W-2 (Wage and Tax Statement), Form 1099-NEC (Nonemployee Compensation), 1099-MISC (Miscellaneous Income), 1099-G (Certain Government Payments), Form 1098 (Mortgage Interest Statement), Property tax payments, Charitable donation receipts, Records related to contributions to and withdrawals from Section 529 plans and Health Savings Accounts, and Records related to deductible retirement plan contributions. Hold on to records relating to property (including improvements to property) until the period of limitations expires for the year in which you dispose of the property. You’ll need those records to calculate your gain or loss.

Plan for Your 2022 Taxes

You should be collecting the documentation you’ll need for next year’s tax filing deadline on an ongoing basis. Keep up-to-date records of items such as charitable donations and mileage expenses. In addition, this is a good time to reassess your current tax withholding to determine if you need to update your Form W-4, (Employee’s Withholding Certificate.) You may want to increase withholding if you owed taxes this year. Conversely, you might want to reduce it if you received a hefty refund. Changes also might be in order if you expect to experience certain major life changes, such as marriage, divorce, childbirth or adoption this year. If you make estimated tax payments throughout the year, consider reevaluating the amounts you pay. You might want to increase or reduce the payments on account of changes in self-employment income, investment income, Social Security benefits and other types of nonwage income. To preempt the risk of a penalty for underpayment of estimated tax, consider paying at least 90% of the tax for the current year or 100% of the tax shown on your prior year’s tax return, whichever amount is less.

When it comes to strategies to reduce your 2022 tax bill, recent downturns in the stock market may have some upside.

• If you have substantial funds in a traditional IRA, this could be a ripe time to convert them to a Roth IRA. Roth IRAs have no required mandatory distributions, and distributions are tax-free. You must pay income tax on the fair market value of the converted assets, but, if you convert securities that have fallen in value or you’re in a lower tax bracket in 2022, you could pay less in taxes now than you would in the future. Moreover, any subsequent appreciation will be tax-free.
• The market downturn could provide loss-harvesting opportunities, too. By selling poorly performing investments before year end, you can offset realized taxable gains on a dollar-for-dollar basis. If you end up with excess losses, you generally can apply up to $3,000 against your ordinary income and carry forward the balance to future tax years.
• If you itemize deductions on your tax return, you also might consider “bunching” expected medical expenses into 2022 to increase the odds that you can claim the medical and dental expense deduction. You’re allowed to deduct unreimbursed expenses that exceed 7.5% of your adjusted gross income. If you expect to have, for example, a knee replacement surgery next winter, accelerating it (and all of the follow-up appointments and physical therapy) into this year could put you over the 7.5% threshold.

Stay Ahead of the Game

Tax planning is an ongoing challenge. Please reach out to your designated DVI Relationship Manager if you’d like help taking the necessary steps to minimize your filing burden and thinking through strategies that could reduce your tax bill.

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