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Banking Tip of The Month: Five Ways to Help Prepare for Tax Time and Wrapping up Your Year

Posted in: Business Banking, Personal Banking, Planning & Budgeting

Banking Tip of The Month: Five Ways to Help Prepare for Tax Time and Wrapping up Your Year

As we close in on the end of the year, it’s never too early to start thinking about what’s looming on the horizon - tax time! While paying taxes is not necessarily something that we enjoy doing, it’s a necessary part of life - and the better prepared you are going into tax season, the easier it will be to minimize its impact. 

We’re providing the tips below to help you head into tax time better prepared. It’s important, however, that you consult a professional tax advisor for details and specific recommendations. Dream First Bank is not a tax advisor, but with the following recommendations in mind, you’ll be well on your way to a more successful tax time.

1. Max out your retirement account contributions

Many people are putting aside money into tax-advantaged retirement accounts (such as a traditional IRA or 401(k) plan). These programs allow for your money to compound over time and are funded with pre-tax dollars. That’s why these types of investments are so great for your future. They’re also beneficial at tax time, since any contributions you make to these plans lower your taxable income.

For the current tax year (2022), the maximum allowable 401(k) contributions are as follows: 

  • $20,500 up to age 49
  • $27,000 for age 50+ (with $6,500 catch-up contribution)

For the current tax year (2022), the maximum allowable IRA contributions are as follows:

  • $6,000 up to age 49
  • $7,000 for age 50+ (with $1,000 catch-up contribution)

If you are putting aside qualified funds for healthcare expenses via an HSA (health savings account), you’ll also want to consider maxing out contributions to that account (currently $3,650 for individuals, $7,300 for families, and an additional $1,000 for individuals age 55+).

2. Spend any leftover funds in your flexible spending account (FSA)

FSAs are a special kind of bank account to help pay for out-of-pocket healthcare costs. It earmarks pre-tax dollars for medical expenses, which lowers your taxable income.

If your employer provides an FSA option, you’ll let them know how much from each paycheck to set aside. It’s important to keep in mind that you’ll pay taxes on any funds still in the account on December 31 (yet some employers may give you until March of the following year to use your set-aside FSA funds). If not used, you risk losing access to the funds unless your employer allows a certain amount in rollovers for the next calendar year.

3. Check your paycheck withholdings

While it may not happen often, an incorrect W-4 from your employer can result in an unexpected refund – or an unexpected tax bill - come tax time. the IRS eliminated the old system of withholding “allowances” in 2020 and now provides employees with the ability to indicate a specific amount they would like to increase or decrease their federal tax withholdings. 

You can use the IRS Tax Withholding Estimator to find out if you’ve been withholding the right amount. You can use the online tool to also calculate your desired refund amount.

4. Organize your records for tax time

Having a good organization process may not cut your taxes, but being organized provides other rewards - some of which can be financial. For many, the biggest hassle at tax time is getting all of the documentation together. This includes having access to last year’s tax return, the current year’s W-2s and 1099s, donation receipts, etc.

What are some of the ways to get started?

  • Head into tax time with a checklist to help you gather all the important documents you’ll need to complete your tax return. The folks over at TurboTax have a great resource of important documents that you can find here.
  • Ensure that you have a specific folder or area in your home (or business) to save all the information that will start arriving in the mail, such as W-2s, 1099s, and mortgage interest statements. With so much “junk mail” arriving in your mailbox, it’s important that you are careful you don’t accidentally throw out any tax-related documents, even if they don’t look very important.
  • Organize the receipts and information that has you have accumulated over the prior year so they are easily accessible for your tax preparation efforts.
  • Grouping similar documents together, such as putting them in different file folders, is a great strategy to help keep things organized.
  • If you invested in, or sold any stocks or securities, be sure that you know the price you paid or what the the sold amount was. If you’re not sure, get in touch with your broker before you start to prepare your tax return and they should have this information for you.
  • If you have income from rental properties, be sure that you have the details documented (rent, mortgage payments, repairs, etc.). It’s also good to not assume that any tax-free municipal bonds are completely free of taxes (another good reason to have a tax expert and broker you trust in your corner).

5. Shield yourself from tax scams and fraud

As tax season approaches, many people start getting phone calls, emails, and text messages from entities claiming to be the IRS. So many that the IRS has created a “Dirty Dozen” list of common tax scams that you need to be wary of.

It’s important not to respond to telephone calls or emails from those who pretend to be the IRS or the U.S. Treasury. These organizations are never going to call you on the phone and ask for your information. In fact, the U.S. mail is the only way the IRS will contact you.

It’s also important to have your tax return prepared by someone that you can trust. With the promise of “a bigger refund,” it’s easy to see why some consumers stray and trust their tax preparation to what may seem like a good idea. 

You may not know it, but the IRS website has a list of registered tax preparers to help avoid scammers. Additionally, direct deposit of your refund (if you’re lucky to receive one following your tax filing) is another safeguard and ensures that your payment goes directly into your account. You can set up direct deposit with the IRS during the filing process if you expect a return - or, if you will owe money, be sure to send it through IRS Direct Pay.

Tax Information from Dream First Bank

If you’re a customer at Dream First Bank, we’ll be sending you information via U.S. Mail, such as 1099 and 1098 interest statements for your deposit and mortgage loan accounts. Often this information can also be obtained via our online banking service as well, so you can get early access to the numbers and start the tax planning process.

If you have any questions, don’t hesitate to get in touch or stop by your local branch to chat with a Dream First Bank representative. While we may not be able to make tax time “enjoyable” - we’ll do what we can to make it as smooth as possible for you! 


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