Did you get a big tax refund, or get hit with a big tax bill, from your 2022 tax return in April? The Illinois CPA Society suggests taxpayers start preparing for the next tax season now.

CHICAGO, July 17, 2023 – Tax Day may have come and gone, but that doesn’t mean taxes shouldn’t stay top of mind. If you found yourself either breathing a sigh of relief or gasping in unexpected shock when you saw the outcome of your 2022 tax year filings, there’s likely some smart money moves to make ahead of the 2023 tax year filing season. Whether you received a surprising tax refund, or got hit with an unexpected tax bill, it’s important to understand why. Here’s what to consider.

1. Review your 2022 tax return. The key to understanding why you may have gotten a bigger or smaller tax return, or had to pay a larger tax bill, than expected is in your tax return. Maybe you received a one-time bonus that you owed additional taxes on. Or perhaps you’re now earning higher recurring income from a promotion, career move, or side hustle. If one of these latter scenarios is the culprit, you may need to adjust your payroll withholdings or even begin making quarterly estimated tax payments to avoid any surprises come next April. For instance, if your side hustle is generating notable self-employment income, making estimated payments is almost certainly a must because, beware, if you’re not paying enough tax throughout the year through payroll withholdings and estimated tax payments, you may be charged a penalty come tax time.
   
   
2. Check your withholdings. If you owed more taxes than expected, especially if you had no self-employed income or one-off income events occur, revisiting your payroll withholdings is a must. In fact, doing at least a mid-year check-in annually is a savvy tax move. If you’re a W-2 employee, adjusting your payroll withholdings on your W-4 is one of the easier ways to ensure you’re setting aside the right amount of taxes from each paycheck.

   Taxpayers can use the IRS’ free withholding estimator to help determine if making any changes is beneficial or necessary. Some common reasons for needing to update one’s payroll withholdings include starting a new job that causes a notable income shift and family changes, like marriage, divorce, or welcoming a new child or other dependent into your family. Another important factor is when a dependent child turns 18, as you may no longer receive a Child Tax Credit for that dependent.

3. Revisit your investments. Unexpected investment income can be a tax burden for the unprepared. Understanding what types of accounts your investments are in can help manage expectations. Investments are commonly held in either a taxable brokerage, tax-deferred, or tax-free account, or maybe all or some combination of these accounts.

   From a tax planning perspective, it’s beneficial to understand how the different types of investment income are taxed. For example, long-term capital gains (profits on an investment held at least one year) are taxed at 15% for most people. But short-term capital gains (profits on an investment held less than one year) are taxed at your ordinary tax rate. Ordinary dividends are also taxed at your ordinary tax rate, whereas qualified dividends are taxed at 15% for most people and even 0% for some. With this in mind, you’ll want to be strategic about the types of investments held in each type of account.
   
   For instance, speculative stock investments that may incur swings in capital gains or losses, or stocks that don’t generate dividends might be better held in a taxable brokerage account, while income-producing investments—think bonds, real estate investment trusts, and certain dividend-paying stocks—that may trigger an annual tax bill might be better to place in tax-deferred (i.e., a 401(k) or individual IRA) or tax-free (i.e., a Roth IRA) retirement accounts if you don’t need the income now. How much taxable income you contribute to these account types also impacts how large or small your tax refund or tax bill may be. However, deciding on which accounts, and which types of investments, to ultimately utilize most to manage one’s taxes is trickier than you might think—and it depends on more than just your current and future tax brackets

Tax planning is a specialty. If in doubt, the Illinois CPA Society reminds taxpayers that CPAs, certified public accountants, are ready to help. CPAs are strategically positioned to not only prepare and file your tax returns but also to help manage your taxes and personal finances all year long. The Illinois CPA Society’s free “Find a CPA” directory can help you find the trusted, strategic advisor that’s right for you based on location, types of services needed, and languages spoken. Find your CPA at www.icpas.org/findacpa.