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Investing Specialists

4 Strategies for an Organized Tax Season

Has tax season become a frustrating paper chase? These tactics can buy you some relief.

Editor's note: This content is part of Morningstar's Tax and IRA Guide special report. A version of this article was published on Jan. 20, 2020. 

This article has been updated to reflect the new U.S. tax filing deadline of May 17, 2021. 

As is the case almost every year, tax day is apt to sneak up in a hurry. Whether you use tax-preparation software or outsource your tax prep to a CPA, here are some key strategies to ensure a smooth and worry-free tax season.

Strategy 1: Use a tax checklist or organizer.
Using some type of a tax checklist or organizer can help you avoid that paper chase and assemble all of the key documents you need in advance; completing your return is then a matter of filling in data. Tax checklists abound online.

If you outsource your tax preparation to an accountant, it's a good bet he or she sends you a tax organizer to work from, either paper or digital; such forms often come prepopulated with your tax data from the previous year. Comparing the current tax year's numbers to those of the year prior can be a handy way to track trends in your income, interest earned on your investments, and charitable giving, among other items.

Strategy 2: Determine if you'll be itemizing or taking the standard deduction.
A key next step in gearing up is to determine whether you'll be itemizing your deductions or taking the standard deduction.

If you employ a tax advisor to help with your tax return, he or she may have provided some guidance on this issue based on your 2019 return. If you do your taxes on your own, you can probably get a pretty clear view of whether you'll itemize or use the standard deduction by taking stock of the major deductible items. For 2020, your itemized deductions would need to be greater than $12,400 for single taxpayers and $24,800 for married couples filing jointly for itemizing to be worthwhile. 

For most households, the biggest-ticket deductible items include state and local taxes (including property taxes), which are now capped at $10,000 per household; charitable deductions; home mortgage interest (note the changes in the rules that went into effect in 2018); and medical expenditures in excess of 7.5% of adjusted gross income. 

Armed with information about whether you'll itemize or claim the standard deduction, you can then know whether you need to round up supporting documentation. If you're claiming the standard deduction, you won't need to bother, but if you're itemizing, you will.

If you're aiming to find documentation of your deductible expenses but can't track down all of the receipts you need, don't despair. The previous year's credit card statements, which you can retrieve online, can help you identify expenses you incurred over the past year; if your credit card company prepares an annual accounting of your expenditures organized by category, that can provide an invaluable tool to your deductible expenses. (I thought I had been carefully stashing away receipts and acknowledgments of my charitable donations, for example, but I found that my credit card company had documentation that I was missing.) Healthcare providers and pharmacies are also usually happy to prepare a year-end statement documenting your out-of-pocket outlays over the previous year. 

Even if you've determined you're not an itemizer, take note of the special $300 charitable deduction for non-itemizers that was part of the CARES Act, passed in response to the pandemic last spring. The deduction is available for cash contributions--not contributions of property--to qualified charitable organizations. If you're an itemizer, you can't claim this deduction. It's small, but it's a way to claim a bit of credit for charitable contributions you made last year. Also note that this deduction will be expanded a bit for 2021: Married couples filing jointly will be able to deduct $600 in charitable contributions of cash. 

Strategy 3: Round up your investment documentation.
Around this time of year, W-2s and 1099s, which report various types of income you may have received, begin to roll in. Bear in mind, however, that the deadline for sending out 1099s is a bit later than other forms you might receive, like W-2s; it's mid-February and even later for some investment providers. If you want to get a jump on your taxes but still don't have all of the documents you need, you may be able to get the information you seek by hopping online with your investment providers; firms typically maintain "tax centers" where you can download and/or print out the relevant forms, including 1099s that haven't yet arrived or that you've mislaid. Don't just stuff your 1099s in a folder; also take a moment to see if you can learn anything that might help you improve your portfolio

Strategy 4: Knock off your contributions as soon as possible.
Your deadline for contributing to an IRA or health savings account is the same as your tax-filing deadline. But that doesn't mean you need to wait until you get your taxes in to tackle those tasks. In fact, if you want to deduct your health savings account or IRA contribution on your tax return, you'll need to make that contribution before you file your return. Ditto if you're taking advantage of the Saver's Credit. Note that these deductions are available to you whether you itemize your deductions or not. However, you can't make an IRA contribution unless you have earned income. You can't make an HSA contribution unless you're covered by a qualifying high-deductible health care plan; an HSA is also off-limits if you're covered by Medicare.

Even if you're not deducting your contribution (you're making a Roth IRA contribution, for example), there's an opportunity cost to waiting until the last minute to make these contributions. And those opportunity costs can add up if you're a serial procrastinator and are a number of years away from retirement. Assuming you invest in something that goes up more often than it goes down, you'll lower your return by waiting until your tax-filing deadline each year.

Of course, from a practical standpoint, some investors wait to make those contributions because they want to see what their tax bills are first. If that describes your situation, consider signing on for an automatic-investment program for your future IRA contributions so you're not at the mercy of your tax bill each year. For the 2021 tax year, investors under age 50 can hit their full $6,000 maximum IRA contribution by putting in an even $500 a month; those over 50 can max out with a $583.22 monthly contribution.