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. 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, taxes aren't as unpredictable as they can sometimes feel.
Read on for nine actions you can take during tax season and throughout the year to destress the tax process and shore up your finances at the same time.
1. Keep good records.
Filing your tax return is much easier when all your necessary documents are organized. If you store necessary tax documents throughout the year in an easy-to-access location, you’ll have everything you need when the time comes.
Examples of required documents include W-2s, 1099s, health care coverage forms, charity donation receipts, expense tracking and mileage records.
Also, consider this strategy 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. Then you can check those forms off as you collect them.
2. Review your prior year’s expenses.
Take the time to review your past year's expenses. Where there any changes? Did your family grow? Did you change jobs or move? All these events could come with their own expenses and could impact your tax liability, potentially saving you money.
But even without changes, a simple review of your spending 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. 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. Take some time today to check out USAA’s budgeting resources.
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. It might mean prioritizing your savings by opening up a dedicated savings account. A tax refund can be a great jumpstart to a fully funded emergency fund.
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. 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 your budget, as it eats away at your purchasing power over time. However, there's a silver lining to this cloud.
Our tax system and Social Security make provisions for inflation. For example, the standard deduction and tax brackets can both increase from year to year to help offset the effect of inflation.
Those receiving Social Security usually begin to watch the news around October. Why? They eagerly await an announcement if the Social Security Administration will announce a cost-of-living adjustment for the next year. Once more way to help combat inflation.
Changes in the tax brackets, deduction amounts, and income all affect what your tax rate can be. Run the numbers as early as possible to be prepared.
4. Understand whether your forgiven student loan is taxable.
In 2021, a law passed called the American Rescue Plan Act (ARPA), which made student loan forgiveness nontaxable through 2025 for federal income taxesopens in a new window. See note 1
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 affectedopens in a new window. See note 1
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.
But the TCJA is set to expire in 2025 which can bring about some tax ambiguity. But, no matter what the numbers turn out to be, here’s the process you can take to help decide if 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. Good news is that tax software will usually do this calculation for you. But it’s always good to know what’s going on the background.
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
- Charitable contributions
- Capital losses
- Gains from sale of home if meeting exclusion of gain rules
- Losses from disasters and theft
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. You can visit this IRS link to learn more about Child and Dependent Care Creditopens in a new window. See note 1
You may be able to offset qualified education expenses for you, your spouse or children with the Lifetime Learning Creditopens in a new window. See note 1 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, or AGI.
Qualifying medical expenses, which includes dental expenses, are typically payments made to doctors and hospitals. It can include program costs for smoking cessation or doctor-prescribed weight-loss plans.
But it can be tricky. Here’s one example. While smoking cessation programs are covered, the cost of non-prescription drugs like nicotine gum or patches can’t be included. That’s why it’s important to seek qualified tax advice if you have questions.
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.
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. 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 and vehicle 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 to your net worth. An easy calculation is to add up the value of what you own and then subtract your debts or what you owe money on. What’s left is your net worth.
Learn more about the value of extra liability protection with umbrella insurance.
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 Marketplaceopens in a new window. See note 1 While the tax penalty for not maintaining health insurance was repealed in 2019, it's a significant financial risk to go without health insurance.
If you are in the military and the terms mentioned above are a bit confusing, don’t be alarmed. They are for most military members. I suggest taking some time to learn about civilian benefits by reading this article. It will give you a leg up for when you decide to transition from military to civilian life.
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.
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 life insurance.
Also, keep in mind that insurance premium payments may be eligible for tax deductions for policies that provide coverage for qualified long-term care.
7. Review your contributions to savings plans.
Making annual contributions to retirement plans such as a 401(k), 403(b) or Thrift Savings Plan (TSP) can help reduce your current tax liabilities and increase the resources you may have when you no longer want to work. That is, when contributing to the Traditional version of these plans and not the Roth version, which doesn’t reduce 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. You might want to consider a Roth IRA even if you are eligible to deduct contributions. A Roth IRA provides 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.
Unsure which one is best for you. Take some time to learn more about the Roth versus traditional IRA by reading this article.
If you are covered by a high deductible health plan, or HDHP, you may be eligible to contribute to a Health Savings Account, or 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.
On a side note, TRICARE isn’t a HDHP and therefore, those under TRICARE aren’t eligible for an HSA.
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.
One of USAA’s core financial principles is to “have guaranteed lifetime income” That means monthly expenses should be paid for from guaranteed or fixed income sources, 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.
Need help at tax time?
Find helpful tax tips and resources at USAA Tax Center.