Prepare early to make tax filing easier

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As reported in High Plains Journal. As the year winds down, taxpayers can prepare early for the 2022 tax filing season.

Laura Hendrix, associate professor of family and consumer science for the University of Arkansas Division of Agriculture, said getting a head start on the process offers several advantages.

“The main advantages of preparing for taxes before January 2022 are planning ahead to maximize retirement contributions and estimating taxes to plan ahead if payments will be needed,” Hendrix said.

Charitable contributions

Preparing for tax season is also important for charitable contributions, which may be tax-deductible and must be made by Dec. 31, 2021 to count as an itemized deduction for the 2021 tax year. Hendrix advised that taxpayers keep good records of charitable donations and contributions to help ease the filing process.

“Special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction,” Hendrix said. “Usually, this includes obtaining an acknowledgment letter from the charity before filing a return and retaining a canceled check or credit card receipt for contributions of cash.”

For details on recordkeeping rules for substantiating gifts to charity, see Publication 526, Charitable Contributions, available at www.IRS.gov.

Standard vs. itemized deductions

Organized recordkeeping is also critical for individuals planning to itemize deductions on their federal tax income return. Taxpayers can either itemize deductions or use the standard deduction, although itemization requires documentation for each of the items, Hendrix said.

“Deductions reduce the amount of your taxable income,” Hendrix said. “The standard deduction amount varies depending on your income, age, and filing status, and it changes each year. You should itemize deductions if your allowable itemized deductions are greater than your standard deduction, or if you must itemize deductions because you can’t use the standard deduction.”

Both standard and itemized deductions require acknowledgment of charitable contributions. To determine standard deductions, use the online form at www.irs.gov/help/ita/how-much-is-my-standard-deduction.

Retirement contributions

The end of the year is also an opportune time to plan how to maximize retirement contributions. Hendrix said there are limits to how much employers and employees can contribute to an individual retirement plan each year.

“The plan must specifically state that contributions or benefits cannot exceed certain limits, and the limits differ depending on the type of plan,” Hendrix said. “The basic limit on elective deferrals is $20,500 in 2022, $19,500 in 2020 and 2021. Catch-up contributions may also be allowed if the employee is age 50 or older. You can make 2021 IRA contributions until April 15, 2022.”

There are several different types of employee contributions:

Salary reduction/elective deferral contributions are pre-tax employee contributions that are generally a percentage of the employee’s compensation. Some plans permit the employee to contribute a specific dollar amount each pay period. 401(k), 403(b) or SIMPLE (Savings Incentive Match Plan for Employees) IRA plans may permit elective deferral contributions.

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