Tax Tips and More
January 2023

 

Upcoming dates:

January 16

 - Martin Luther King Jr. Day

January 17

 - 4th quarter installment of 2022 estimated income tax is due for individuals, calendar-year corporations and calendar-year trusts & estates

Begin tax filing for 2022

 - Organize tax documents (W-2s, 1099s, 1098s and other records)

 - Schedule tax appointment for document drop off or meeting

Begin tax planning for 2023

 - Create a budget

 - Adjust your withholdings

 - Rebalance investment portfolios

 

It's tax time! In the next couple of weeks you will be inundated with W-2s and various informational tax forms like 1099s. By paying attention to them, ensuring their accuracy, and that you are getting them all, you will be miles ahead in getting your tax return done. Spend a minute reviewing ways to get your tax information organized. As always, feel free to reach out with any question or comments.

 

It's Tax Time! Tips to Get Organized

The beginning of a new year brings the need to recap the previous one for Uncle Sam. Here are some tips and a checklist to help get you organized.

• Look for your tax forms. Forms W-2, 1099, and 1098 will start hitting your inbox or mailbox in the next couple of weeks. If you have not already done so, review last year's records and create a checklist of the forms to make sure you get them all.

• Collect your tax documents using this checklist. Using a tax organizer or last year's tax return, sort your tax records to match the items on your tax return. Here is a list of the more common tax records:

• Informational tax forms (W-2s, 1099s, 1098s, 1095-A) that disclose wages, interest income, dividends and capital gain/loss activity

• Other forms that disclose possible income (jury duty, unemployment, IRA distributions and similar items)

• Business K-1 forms

• Social Security statements

• Mortgage interest statements

• Tuition paid statements

• Property tax statements

• Mileage log(s) for business, moving, medical and charitable driving

• Medical, dental and vision expenses

• Business expenses

• Records of any asset purchases and sales, including cryptocurrency

• Health insurance records (including Medicare and Medicaid)

• Charitable receipts and documentation

• Bank and investment statements

• Credit card statements

• Records of any out of state purchases that may require use tax

• Records of any estimated tax payments

• Home sales (or refinance) records

• Educational expenses (including student loan interest expense)

• Casualty and theft loss documentation (federally declared disasters only)

• Moving expenses (military only)

If you aren't sure whether something is important for tax purposes, retain the documentation. It is better to save unnecessary documentation than to later wish you had the document to support your deduction.

• Clean up your auto log. You should have the necessary logs to support your qualified business miles, moving miles, medical miles and charitable miles driven by you. Gather the logs and make a quick review to ensure they are up to date and totaled.

• Coordinate your deductions. If you and someone else share a dependent, confirm you are both on the same page as to who will claim the dependent. This is true for single taxpayers, divorced taxpayers, taxpayers with elderly parents/grandparents, and parents with older children.

With proper organization, your tax filing experience can be timely and uneventful.

 

Tips to Get Your Finances in Tip-Top Shape

Here are some tips to get your finances in tip-top shape for 2023.

• Know your net worth. The first step to improving your finances in 2023 is to create a snapshot of your current financial situation. So note all your assets, then subtract all your liabilities (what you owe others) to calculate your net worth. When done on a regular basis, you will be able to evaluate changes to your financial status and identify steps to reach your financial goals.

• Plan for hardships. If the pandemic has taught us anything, it's to plan for the unexpected. Now is the time to prepare by building an emergency fund that covers six or more months of expenses.

• Prepare for a lower refund. The 2021 tax year saw increases to the child tax credit and the dependent care credit, resulting in a big jump in tax refunds for many taxpayers. These changes, however, were not extended to 2022. If you plan to take advantage of either of these two credits on your 2022 tax return, be prepared for a possible decrease in your refund.

• Create a debt repayment plan. Design a plan to pay off your existing debts and try to avoid taking on any new debt. Pay special attention to credit card debt, as inflation is vastly increasing the cost of this debt every month! Also consider whether consolidating your debt is a good option for you.

• Save for retirement. Plan for your future self by building your retirement fund. In 2023 you can contribute up to $22,500 in your 401(k), plus another $7,500 if you're 50 or older. Keep in mind your company may provide matching contributions up to a stated percentage of compensation. And you may be able to supplement this account with contributions to IRAs and/or other qualified plans.

• Review and re-balance your portfolio. Review your investments periodically and reallocate funds to reflect your main objectives, risk tolerance, and other personal preferences. This will put you in a better position to handle the ups and downs of the markets.

• Set a date to review your estate. Review your estate and legal documents at least once a year, in addition to whenever you experience a significant change in your life. Now is a good time to review your will, trust documents, beneficiary designations, powers of attorney, healthcare directives, and other estate- and legal-related documents.

 

Keys to Keeping Great Business Records

Your bookkeeping system is the financial heart and lifeblood of your business. When set up and operating properly, your books help you make smart decisions and seamlessly turn your financial data into useful information. Here are four key characteristics to building and maintaining a healthy bookkeeping system:

• Select the proper accounting method. There are two different methods for recording transactions: cash-basis and accrual-basis. In general, the cash-basis method records a transaction when a payment is made, while the accrual-basis method books the transaction upon delivery of the good or service. Cash-basis is easier to track and a useful option for smaller businesses and sole-proprietors. Larger businesses who buy from vendors on account (accounts payable) generally use accrual-basis accounting.Selecting the proper method affects any related financial transactions and how your financial statements are displayed. A correct approach will also include consideration of outside factors, including IRS rules (businesses with more than $25 million in gross receipts must use accrual-basis), bank covenants, and industry standards. Once a choice is made, it can be changed but it must be properly reported to the IRS.

• Create an account structure that fits the company. Every business has a chart of accounts included in their bookkeeping system. These accounts sort the business’s transaction data into six meaningful groups. They are assets, liabilities, equity, income, cost of goods sold and other expenses. Each group will often have numerous accounts and sub-accounts associated with them. Having the right mix of accounts, created and grouped in an organized fashion, will help you properly classify transactions and prepare usable financial statements. The proper account structure for your company will mesh with your specific information needs.

• Enter accurate and timely transactions. The value your data provides is dependent on each transaction being recorded correctly and on time. Entering transactions in the wrong account can cause major issues down the road. Financial reporting that is delayed can hide problems that need immediate attention. Some transactions are relatively straightforward, and some are more complex (like payroll, accruals and deferrals).It’s important to have someone who understands both your business and the accounting rules to enter your transactions in a timely fashion. In addition, a good month-end close process that involves reviewing each account will help you identify and fix mistakes from the initial entries.

• Establish financial statements for decision-making. The main financial statements are the income statement (income - expenses = gross profit), the balance sheet (assets - liabilities = equity) and statement of cash flow. Each statement has a specific purpose:

• Income statement. The income statement shows company performance for a select period of time, typically monthly with a full-year summary. At the end of each year the income statement restarts.

• Balance sheet. The balance sheet displays a company’s overall health on a specific date. It is perpetual. This means it doesn’t end until the business is closed or sold. It includes one line that summarizes the current year and prior year results from the income statement.

• Statement of cash flow. This statement summarizes the inflows and outflows of cash. It ensures you know whether you have enough cash and the pattern of your cash position over time.

If properly executed, your bookkeeping system will create accurate financial statements that can be used to make key financial decisions. Feel free to call with any questions or to discuss bookkeeping solutions for your business.

 

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

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