Preparing for Tax Season: A Family Guide
Get organized now to reduce stress and uncover opportunities.
Tax season doesn't have to feel like a scramble. With a bit of organization now, you can transform what many families dread into a smooth process that might even reveal opportunities you hadn't considered.
Whether you prepare your own taxes or work with a CPA, being organized makes everything easier. Documents are readily available when needed. Questions get answered quickly. And you have time to explore strategies that could reduce your tax burden, rather than rushing just to meet the deadline.
Here's a practical guide to help your family prepare for tax season with confidence.
Gathering Your Tax Documents
Start by creating a dedicated folder, physical or digital, for this year's tax documents. As mail arrives or forms become available online, add them to this folder immediately. By the time you sit down to prepare or review your taxes, everything will be in one place.
Income documents typically arrive throughout January and early February. Expect W-2 forms from employers, 1099 forms for freelance income, interest, dividends, and investment sales, and K-1 forms if you have partnership or S-corporation interests. K-1s often arrive later, sometimes in March, so plan accordingly if you receive them.
Tax Documents for Energy Industry Professionals
For professionals in the energy industry, tax document gathering is more complex due to equity compensation. Pay particular attention to these forms and records:
Stock Options:
When you exercise non-qualified stock options (NQSOs), the spread between exercise price and market value appears as ordinary income on your W-2. Keep records of your exercise date, number of shares, exercise price, and fair market value at exercise. If you exercised incentive stock options (ISOs), track the same information for potential AMT calculations.
Restricted Stock Units (RSUs):
RSU income appears on your W-2 when shares vest. Your brokerage will provide Form 1099-B if you sold shares, showing proceeds. However, 1099-B cost basis is often incorrect for RSUs, reporting $0 instead of the fair market value at vesting. Keep your own records of vesting date, number of shares vested, and fair market value at vesting to ensure accurate cost basis reporting.
Employee Stock Purchase Plans (ESPP):
ESPP sales require careful handling. The discount you received is ordinary income, while additional gains may be capital gains. Form 3922 from your employer provides purchase information, and Form 1099-B shows sale proceeds. Your holding period determines whether gains receive favorable long-term capital gains treatment.
Deferred Compensation Distributions:
If you received distributions from non-qualified deferred compensation plans, these appear on your W-2 as ordinary income. Keep records of your original deferral elections and any previous distributions for your records.
Supplemental Tax Forms:
Look for Form 3921 (ISO exercises), Form 3922 (ESPP), and detailed statements from your equity compensation administrator. These help your CPA accurately report equity transactions.
Deductions and Credits to Consider
Many families leave money on the table by overlooking deductions and credits they're entitled to claim. As you gather documents, think about these common categories.
Charitable contributions include more than cash donations. If you donated clothing, household items, or a vehicle, you need records of fair market value. For donations over $250, you need written acknowledgment from the charity. If you made significant donations, consider whether bunching strategies might help maximize your tax benefit.
Energy Professional Tip: Donating appreciated company stock to charity can be highly tax-efficient. You receive a deduction for the full market value while avoiding capital gains tax on the appreciation.
Medical expenses that exceed 7.5% of your adjusted gross income may be deductible. This includes insurance premiums you paid with after-tax dollars, out-of-pocket costs, and certain long-term care expenses. For families with significant medical costs, especially those caring for aging parents, this deduction can be valuable.
Education expenses offer several tax benefits. The American Opportunity Credit and Lifetime Learning Credit help offset higher education costs. Contributions to 529 plans may provide state tax deductions. Student loan interest is deductible up to certain limits.
If you work from home, you may be eligible for the home office deduction. This requires dedicated space used regularly and exclusively for business. Energy-efficient home improvements may qualify for credits as well.
Coordinating With Your Financial Plan
Tax season is an excellent time to ensure your financial life is working together effectively. As you review last year's numbers, consider how your tax situation connects to your broader goals.
Review your withholding and estimated payments. Did you owe a significant amount or receive a large refund? Neither is ideal. Owing means you might face penalties, and large refunds mean you've given the government an interest-free loan. Adjust your W-4 or estimated payments to better match your actual liability.
Energy Professional Note: Equity compensation can create significant tax liability in the year shares vest or options are exercised. Consider increasing withholding or making estimated payments in years when you expect large equity events.
Consider retirement account contributions. If you haven't maximized contributions to tax-advantaged accounts, you may still have time to contribute to traditional or Roth IRAs for the previous tax year until April 15. This is one of the few tax strategies you can implement retroactively.
Evaluate your investment portfolio for tax efficiency. Are your assets located in the most tax-advantaged accounts? Would tax-loss harvesting make sense this year? Understanding last year's investment tax consequences helps inform this year's strategy.
Working Effectively With Your CPA
If you work with a tax professional, being organized and proactive makes their job easier and often saves you money on preparation fees.
Provide documents as early as possible. Tax professionals are slammed during peak season, so clients who get materials in early often receive more attention and thorough review.
Communicate life changes proactively. Marriage, divorce, children, home purchases, job changes, and retirement all affect your tax situation. Don't assume your CPA will know about these changes from reviewing documents.
Energy Professional Tip: If you changed employers, exercised options at a former company, or had equity vest after leaving, communicate this clearly. These situations often create the most complex tax scenarios.
Ask questions and seek to understand. Your tax return contains valuable information about your financial life. Take time to understand what the numbers mean and what strategies might help in future years.
Avoiding Common Tax Mistakes
Even organized families sometimes stumble on common tax issues. Watch for these pitfalls.
Missing or incorrect Social Security numbers cause processing delays. Double-check these numbers, especially for dependents.
Failing to report all income, even small amounts, can trigger IRS notices. Every 1099 gets reported to both you and the IRS. Make sure your return includes everything they expect to see.
Energy Professional Warning: Incorrect cost basis on RSU and ESPP sales is one of the most common errors we see. Always verify the cost basis on your 1099-B matches your records, not what your brokerage reported.
Math errors remain surprisingly common, though less so with tax software. If you're preparing by hand, check your arithmetic carefully.
Missing deadlines leads to penalties and interest. If you can't file by April 15, request an extension. Remember that an extension gives you more time to file, not more time to pay. Estimate what you owe and pay it by the deadline to avoid penalties.
Looking Beyond This Year
The best tax planning isn't just about this year's return. It's about building a long-term strategy that minimizes your family's tax burden over time.
As you complete this year's taxes, think about what you might do differently going forward. Could you benefit from different retirement account strategies? Would a Roth conversion make sense in a lower-income year? Should you adjust charitable giving timing to maximize tax benefits?
For families building first-generation wealth, understanding tax strategies becomes increasingly important as your financial picture grows more complex. The decisions you make now compound over time, either in your favor or against it.
Need help coordinating your tax planning with your broader financial strategy? Our team works closely with CPAs and tax professionals to ensure your financial plan is tax-efficient across all aspects of your life. Schedule a conversation to explore how we can help you keep more of what you've earned.
FAQs
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A: Begin in mid-January when W-2s and 1099s start arriving. Create a dedicated folder immediately and add documents as they come in. Most forms should arrive by mid-February, though K-1s may come later in March.
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A: Essential documents include W-2s (employment income), 1099s (other income, interest, dividends, investments), mortgage interest statements (1098), property tax records, charitable donation receipts, and any documents for major life events like home sales or retirement account distributions.
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A: For stock options, keep records of exercise date, shares, prices, and look for Form 3921 (ISOs). For RSUs, track vesting dates and values; income appears on W-2. For sales, you'll receive Form 1099-B. Always verify cost basis accuracy, as brokerages often report $0 for RSU cost basis.
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A: Yes. You can make IRA contributions for the previous tax year until the tax filing deadline (typically April 15). This is one of the few retroactive tax strategies available.
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A: A tax extension gives you more time to file your return (typically until October 15), but it does not extend your time to pay. You must still estimate and pay any taxes owed by April 15 to avoid penalties and interest.
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A: Keep tax returns and supporting documents for at least 7 years. For documents related to property purchases, investments, or retirement accounts, keep them as long as you own the asset plus 7 years after disposal. For equity compensation, keep records indefinitely as cost basis documentation.
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