9 tax tips to help you prepare your finances for tax season

Jason R. Friday, CFP®, MPAS®, RICP®, CMFC Head of Financial Planning | Citizens Wealth Management

_{As Head of Financial Planning, Jason is a strategic partner who is responsible for developing the strategy, managing the planner teams, and coordinating personal financial planning activities across Citizens Wealth Management to help clients navigate and grow in changing circumstances}

Nearly everyone has to deal with deadlines, whether it's turning in an assignment at work or renewing your car's registration. One important deadline for anyone who earns money is completing and filing your annual income taxes.

Some people submit their tax paperwork as soon as they receive all the financial forms while others wait until the last minute, scrambling to the post office or hurriedly filing online.

Regardless of whether you're a planner or a procrastinator, these tax tips can help you stay on top of best practices and prepare your finances for tax season.

1. Contribute to a 401(k) or IRA

Contributing to a 401(k) or individual retirement account (IRA) isn't only good for preparing for your retirement. It may help lower your taxes. Traditional 401(k)s and IRAs are tax-deferred accounts, which means you may not need to pay income tax on your contributions until you withdraw money later, ideally after age 59½ to avoid added penalties and fees. But making contributions now usually lowers the total of your taxable income for the year, which may reduce your tax obligation.

For 2024 and 2025, the contribution limits for 401(k)s and IRAs are¹:

2024 contribution limits

• 401(k): $23,000, or $30,500 for employees over age 50
• IRA: $7,000, or $8,000 if you are over age 50

2025 contribution limits

• 401(k): $23,500, or $31,000 for employees over age 50
• IRA: $7,000, or $8,000 if you are over age 50

Keep in mind that you can continue to make IRA contributions for 2024 up to the tax-filing deadline of April 15, 2025. This could be the extra time you need to contribute to or max out your IRA for 2024 and potentially lower your taxes before you file them.

For single-income married couples, you can also explore spousal IRAs. Having a spousal IRA basically allows the working and non-working spouse the ability to double IRA contributions each year. For example, if under age 50, instead of being able to contribute $7,000, which is the 2025 contribution limit, you could be able to contribute $14,000 across both IRAs. If interested in a spousal IRA, talk to your financial advisor to learn more about how they work, eligibility requirements and withdrawal rules.

2. Consider Roth IRA conversions or a backdoor Roth IRA

If contributing to a Traditional IRA, it may make sense to consider moving some of those funds to a Roth IRA. This is known as a Roth conversion and it allows you to access the benefits of a Roth IRA, including:

• No required minimum distributions (RMDs)
• Generally, once the money is in the Roth account, it can grow tax-free and qualified withdrawals after age 59½ are tax-free too
• Having a mix of traditional and Roth IRA accounts could provide tax diversification and additional flexibility in retirement

For high-income earners who are phased out of being able to make tax-deductible IRA contributions or contribute to a Roth IRA, a backdoor Roth IRA is a similar strategy that could be an option. For 2025, if you earn more than $165,000 as a single taxpayer or $246,000 as a married filing jointly taxpayer, you can’t contribute to a Roth IRA.¹ However, with a backdoor Roth IRA, you may be able to make nondeductible contributions to a Traditional IRA and then convert those over to a Roth IRA.

Before moving forward, it’s important to fully understand the rules and tax implications. A Roth conversion could create a taxable event or move you into a higher tax bracket for the year. Make sure to speak with your financial advisor and tax professional to determine whether a Roth IRA conversion makes sense for your situation.

3. Put money into an FSA or HSA

Making regular contributions to either a flexible spending account (FSA) or a health savings account (HSA) can be a smart way to save for certain expenses. You make FSA and HSA contributions with untaxed dollars, which may lower your taxable income. Withdrawals are also not taxed as long as they're used for qualified expenses.

Employers may offer two types of FSAs in addition to HSAs:

• FSAs for health care and dependent care: A health care FSA can pay for health-related expenses not covered by insurance, such as dental care, vision care and some over-the-counter products. Dependent care FSAs can pay for expenses like preschool and after-school programs for children or adult day care services. In 2025, you can contribute up to $3,300 to a health care FSA and $5,000 per household, or $2,500 if you are married and file separately, to a dependent care FSA.² These funds expire at the end of the year, although some employers allow extensions.
• HSAs: Using these accounts requires you to enroll in an HSA-eligible high-deductible health plan to qualify. The funds can be used to cover certain qualified expenses, like insurance co-pays and over-the-counter products. For 2024, individuals can contribute up to $4,150 to an HSA, and families can contribute up to $8,300. Unlike FSAs, contributions to an HSA roll over each year instead of expiring and typically you have until the April 15^th tax filing deadline to contribute to an HSA. For 2025, individuals can contribute up to $4,300 to an HSA and families can contribute up to $8,550.

4. Understand state tax law differences

Not all states have the same rules when it comes to determining tax liability. Understanding these differences could help you take advantage of tax-saving opportunities. For example, you could benefit from income exclusions, such as retirement income, or receive credits against your tax liability for long-term care premiums.

Some important differences in state laws to watch for include:

• Residency rules: If you live in one state but work in another, it's important to know how your state determines residency to know which state you need to file taxes with. This may also apply if you work remotely.
• Deductions and credits: Some states may offer tax deductions or credits for education expenses, adopting a child, energy-efficient home improvements, agricultural activities and other things.
• Treatment of retirement income: Some states may exempt Social Security benefits, pensions and other forms of retirement income.
• Treatment of capital gains: In some states, capital gains are taxed at the same rate as ordinary income. Other states may tax capital gains at different rates or exclude them.

5. Declare foreign bank accounts

The IRS requires that if you have aggregate income of more than $10,000 in foreign bank accounts, investment accounts or other reportable accounts, you must disclose them on the Foreign Bank Account Report. Failure to declare them or complete the form could result in serious penalties. If you're unsure if an account should be reported, take the safe route and file the paperwork.

6. Watch your expenses on Schedule C

Schedule C, a form that's required for businesses to report income and expenses, often receives extra attention from the IRS because tax filers have been known to try to manipulate the expenses that they report on the form to lower their tax obligations.

According to the IRS, any expenses you include on the form must be ordinary and necessary. An ordinary expense is something common among other businesses in your industry, such as office supplies for a law firm or uniforms for a hotel. Similarly, a necessary expense is something that's usual and vital to the operation of your business, such as insurance and utilities.

Before you fill out Schedule C, be sure you understand the guidelines on business expenses to avoid raising alarm bells with the IRS. It's also important to maintain accurate records and avoid unusual deductions for your industry.

Also, be sure to keep your personal and business expenses separate. Booking a first-class flight to check on your rental property in the Bahamas as you begin a weeklong family vacation, for example, may not qualify as a business expense.

7. Use tax software or a tax professional

If you are going to prepare your taxes online instead of hiring a tax professional, be sure to use reliable software. Using tax software is usually fine if you have one or two incomes, plan on taking the standard deduction and don't have any complex investments.

If your financial situation is more involved, however, it's important to seek the assistance of a qualified professional to make sure your taxes are filled out correctly. Consider using a tax professional if you have multiple sources of income, complex investments, own rental properties, owe taxes in multiple states or own a business.

8. File an extension if you need more time

Sometimes, people get busy with work, community, family and other obligations and need a little extra time to fill out their taxes. If you're unable to meet the tax filing deadline, don't ignore it. Determine your tax liability and submit the payment along with an extension request to the proper tax authority.

Failure to file an extension or make a payment on time result in significant costs, including a late filing penalty, a late payment penalty and interest.

9. Beware of tax scams

Tax scams are at an all-time high. Predatory fraudsters use a variety of convincing methods to lure people to give them their personal and financial information. If someone contacts you about your taxes, be alert to what they're asking for and what you share with them. The IRS typically only mails notifications through the U.S. Post Office — never via email, text or social media — and they won't threaten you or demand payment by any means other than cash or check payable to the U.S. Treasury.

Some common tax scams to be aware of include:

• Phishing emails and fake websites: Scammers send official-looking emails that claim to be from the IRS, tax preparation companies or other organizations. When you click on a link, it may take you to a legitimate-looking but fake website where they try to obtain your personal and financial information.
• Phone scams: Scammers call claiming to be IRS agents and demand immediate payment for your taxes. They threaten legal action or arrest if you don't make a payment with them right then.
• Identity theft: Scammers use a variety of methods to steal personal information and use it to file fraudulent tax returns and claim refunds. They may sift through your mail or garbage to nab statements with account numbers and personal information. Modern thieves may try hacking into your online shopping accounts. Or, if you're using unsecured public Wi-Fi, they may be able to simply capture the info from the shared connection while you're logged on.
• Fake charities: Scammers create fake charities to solicit donations with the promise of a tax deduction. They may even have names that sound similar to real charities.
• Unethical tax preparers: Some tax preparers who earn a percentage of your tax refund as their commission may underreport your income, claim tax credits that you aren't eligible for or do other things to increase your refund.

Smart tax preparation

Although tax preparation can be frustrating, you may be able to save time and reduce errors by keeping organized records and using tax software or a tax professional. Also, be sure to get an early start on your taxes to avoid filing late, payment penalties, and the need for an extension. If you finish your taxes early, the April filing deadline will be just another beautiful spring day to look forward to.

If you found these tips helpful, consider connecting with a Citizens Wealth Advisor* to talk about your overall financial goals and strategy.

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