Financial housekeeping tips during tax season

Tax season is back. Once again, the time has come to collect important documents and present the findings to Uncle Sam. “Sometimes, filing your tax return can feel like spinning a wheel in a game show,” says Robert Steen, USAA Advice Director. “The dial could land on a tax refund, a bill for additional taxes owed, or the seemingly impossible-to-hit category of ‘breaking even,' meaning you withheld enough and didn't overpay.”

While the tax code can be difficult to understand and moving pieces can impact your finances in different ways each year, Steen admits that taxes aren't as unpredictable as they can sometimes feel.

If you could use help with taxes, read on for nine actions you can take during tax season and throughout the year to destress the process and shore up your general finances.

1. Keep good records.

When you file your tax return, you're required to report your income and expenses. If you save important documents throughout the year and file them in an easy-to-access location, you have everything you need when the time comes.

Examples of required documents include W-2s, 1099s, relevant health care coverage forms, expense tracking and mileage records.

“This year when you file your taxes, make a checklist of all the forms you ended up collecting, and save that list for next year,” Steen suggests. “Then you can check those forms off as you collect them.”

Consider what has changed over the past 12 months. Did your family grow? Did you change jobs or move? All these events could impact your tax liability, potentially saving you money.

2. Review your prior year's expenses.

Take the time to review your past year's expenses; taken as a whole, sometimes your habits can be illuminating. It might not feel like a big deal to shell out another $5.99 per month for a streaming service, but when you see just how many you have, the total may drive you to take action.

“Now is a great time to revisit your budget, which can help you plan for the unexpected and find ways to improve your finances,” suggests Steen. If you don't have a budget or need some help fine-tuning your spending and planning, use a budget tool or a mobile app to better visualize your income and expenses.

While not always an indicator of the future, your past spending can help you project where your money is going in the coming year. Look for ways to save monthly for future goals like your retirement or your kids' education, and be sure you've saved funds for emergencies.

“If you can find ways to reduce outgoing expenses and free up some monthly cash, there may be resources you can use to reduce your tax costs,” says Steen. For example, you may be able to put that extra money into an individual retirement account that entitles you to a tax deduction.

3. Consider how inflation affects your taxes.

The dark cloud of inflation can act like a hidden expense in our budgets, as it eats away at our purchasing power over time. However, there's a silver lining to this cloud, Steen points out.

“Our tax system and Social Security make provisions for inflationary effects,” he explains. “For example, the standard deduction will increase by about 7% for 2023. In addition, tax rate brackets have increased to keep pace with inflation.”

Consider a single-filer taxpayer who makes $41,775 — just at the outer edge of the 12% tax bracket for 2022. If this taxpayer received a cost-of-living salary increase for 2023 of 5%, they'd be pushed into the 24% tax bracket. However, with the 7% adjustment to the tax brackets for 2023, they can stay in the lower 12% tax bracket for 2023.^{See note1}

Those receiving Social Security also got some good news when the IRS announced an 8.7% increase in 2023 benefits.^{See note1} Be aware of the possibility that the increase could push people into a higher tax bracket.

“Run the numbers as early as possible to be prepared,” advises Steen.

4. Understand whether your forgiven student loan is taxable.

During the COVID-19 pandemic in 2021, a law passed called the American Rescue Plan Act (ARPA), which made student loan forgiveness nontaxable through 2025 for federal income taxes.^{See note1}

In August of this year, President Biden announced federal student loan relief for borrowers most in need.^{See note1}

So, will student loan forgiveness be taxed? There are a few important things to note:

• Student loan forgiveness may not benefit everyone, depending on their situation.
• Some states' income tax laws are not on board with not taxing the loan forgiveness. For complicated reasons, several of these states plan to consider cancelled student debt as taxable income, and a few other states with state income taxes are considering doing so.

If you plan to apply — or have already done so — for federal student loan forgiveness, and you live or work in a state with state income taxes, do some homework to see if your taxes are affected.^{See note1}

5. Decide whether to take the standard deduction or itemize.

The Tax Cuts and Jobs Act (TCJA) of 2017 simplified the tax code in several ways, including increasing the standard deduction and eliminating several miscellaneous deductions.

To decide whether you should take the standard deduction or itemize, look at your deductible items over the past year. If those combined expenses don't exceed the standard deduction for your tax situation, it doesn't make sense to itemize your deductions.

If you determine that itemizing is best for your personal tax situation, here are some additional areas to review that can help further offset your taxes:

Common deductions and credits

Common deductions include mortgage interest, student loan interest and charitable contributions. Temporary measures by the U.S. government may have an impact on the amount of student loan interest you paid, or potentially on any child care relief you received during the past year as stimulus support.

Be on the lookout for your various tax statements that reflect the interest amounts you've paid, as well as any receipts for charitable donations.

If your mortgage interest and student loan interest figures don't come close to your standard deduction amount, you may be better off filing your taxes without itemizing for deductions.

Child care and education credits

If you have children, you're no stranger to the expenses of day care, summer camps and babysitters. Qualified child care may be tax deductible depending on your financial situation and age of your children.

This is different than the changes made in 2021 to the Child Tax Credit.^{See note1} The Child Tax Credit was advanced to tax-paying parents during the 2021 tax year so that tax filers didn't have to wait to receive the credit. This was a temporary measure; plan to use this tax credit in the future as you have in previous years.

You may be able to offset qualified education expenses for you, your spouse or children with the Lifetime Learning Credit.^{See note1} Qualified expenses may include be tuition, fees and resources needed for undergraduate, post-grad or professional degrees.

Health care expenses

Health care costs can be a source of sticker shock. Depending on how much you paid in the prior year versus how much income you earned, you may be eligible to deduct your total qualified unreimbursed health care costs that exceed 7.5% of your adjusted gross income (AGI).

Qualifying medical expenses include the typical payments made to doctors and hospitals, and also can include program costs for smoking cessation or doctor-prescribed weight-loss plans. Additionally, insurance premium payments may be eligible for tax deductions for policies that provide coverage for qualified long-term care.

Military moving expenses

Moving costs for military members may be tax deductible. Typically, this includes unreimbursed reasonable expenses for you and members of your household due to a permanent change of station, or PCS.

“In other words, the costs you incur for moving your personal property and travel to get to your new home can potentially offset your taxes,” says Steen.

If you use a moving service, those costs may be deductible, as well. “But if the government reimburses you or provides an allowance for moving costs, those would not be deductible.”

6. Review your insurance needs.

At least once a year, as well as with major life events, review your insurance portfolio.

“Updating your insurance doesn't have direct tax benefits, but having the right coverage in place can help ensure your financial security,” says Steen. “While you have your documents out for taxes, take the opportunity to see if you need to make any changes or updates.”

Your insurance may include the following.

Property insurance

Start by taking a look at your auto, homeowners and renters insurance. Check your deductibles and limits or coverage amounts provided by each policy. In the event that you have to file a claim, you don't want to experience sticker shock when you see your deductible.

Learn more about auto insurance.

Learn how to insure your home.

Protect your property with renters insurance.

Be sure you have consistent liability coverage among your policies. This liability coverage should at least be equal t your net worth — what you own minus what you owe money on.

Learn more about extra liability protection.

Health insurance

You more than likely just went through annual enrollment with your employer if you get your health insurance through your job. At that point, you probably made the major decisions about your health insurance for this next year.

If you elected to contribute to a Health Savings Account (HSA) or Flexible Spending Account (FSA), make sure you have these amounts in your budget.

If you're changing jobs or plan to this year, consider what benefits, if any, are available at your next employer. A job change resulting in a coverage loss or change is often a qualifying event that makes you eligible to enroll in a new plan.

If you don't have coverage through your employer, you may be able to get a plan through the Health Insurance Marketplace.^{See note1} While the tax penalty for not maintaining health insurance was repealed in 2019, it's a significant financial risk to go without health insurance.

Life insurance

Life insurance is a critical component of your financial well-being and can provide your loved ones the resources they need in case the worst happens.

About 46% of Americans don't have life insurance. Take the steps to review your life insurance to make sure that it fits your family's needs. Fill any gaps you might have, especially if your family situation changed over the past year.

Learn more about affordable life insurance.

7. Review your contributions to savings plans.

Making annual contributions to retirement plans such as 401(k)s, Thrift Savings Plans (TSPs) or Individual Retirement Accounts (IRAs) can help reduce your current tax liabilities and increase the resources you may have when you no longer want to work.

If you participate in a 401(k) or are a military member who participates in the TSP, your contributions reduce your current income earnings and therefore your tax liability.

Depending on your annual income, you may be able to deduct contributions to a traditional IRA. Traditional IRAs work similarly to 401(k)s. Your money grows on a tax-deferred basis, meaning you won't pay taxes on the growth within your plan year over year, but you will pay tax on distributions. You may also pay a tax penalty if you take distributions before age 59½.

If you can't deduct your contributions to an IRA, you may want to consider making contributions to a Roth IRA. Roth IRAs provide a tax break in the future because your money can grow tax-deferred, and when you make distributions in retirement, they should be tax-free.

Keep in mind that when you contribute to a Roth IRA there are certain thresholds and limitations.^{See note1}

Like a 401(k) and TSP, you may be able to participate in a Health Savings Account, HSA. If you are covered by a high deductible health plan or HDHP — a health insurance plan with a deductible greater than $1,400 for singles and $2,800 for families — you may be eligible to contribute up to $3,650 for singles and $7,300 for families to an HSA.

HSA plans typically offer various options to grow the money you contribute, and your contributions typically reduce your current income, giving you a break on your taxes. When you use the funds in your account for qualified medical expenses, like those mentioned above, your distributions will be tax-free.

Learn more about HSAs.

8. Make a plan for your retirement income.

Depending on how close you are to retirement, your tolerance for risk and desire for predictability may vary. If you're nearing or currently in your retirement years, it's a good exercise to review your income sources and how long you project them to last.

Your monthly expenses should be paid for from guaranteed or fixed resources, such as Social Security, pensions and annuities. Discretionary expenses like travel should come from other accounts or funds.

9. Consult with an expert if you need help with taxes.

As your tax situation gets more complex, bring in an expert. A reputable professional can offer guidance unique to your financial situation.