Planning for Next Year’s Taxes Starts Now

If you’re looking to lower your tax burden next year, now is actually the time to start planning—rather than waiting until it’s time to file your return.

There are strategies that can help reduce your taxable income or allow you to make better tax decisions with your investments. These measures typically can’t be rushed at the last minute, as the IRS assesses your financial activity from January 1 to December 31 of the previous year. So, getting ready now is beneficial for your future self. Here’s some guidance on how to go about it:

Staying proactive throughout the year is key to lowering your tax bill. Here are a few tips to prepare for next year’s return.

Have your debts climbed more than you anticipated? Or perhaps you got a hefty refund but wish you had more funds available during the year? It’s a good time to review your withholdings at work and adjust your W-4 form.

Your federal income tax withholding dictates how much gets taken out from each paycheck. Here’s a quick rundown:

• If you withhold too little, there’s a risk of facing a tax bill—or even an underpayment penalty.
• On the flip side, if too much is withheld, you might get a larger refund, but you’re essentially letting the government keep that money without interest all year.

This is especially critical after life changes like marriage or having a baby, or if you’re juggling multiple jobs. You don’t have to wait for tax time to make changes either; you can submit a new W-4 whenever your situation shifts.

You can download the W-4 Form from the IRS, fill it out, and send it to your payroll or HR department. Some employers even let you adjust withholdings right from their employee portal.

Unsure how to tweak your W-4? The IRS Tax Withholding Estimator can help you figure out the right amount to withhold.

Another effective way to lower your taxable income is to increase contributions to retirement accounts that offer tax advantages.

Pumping up your contributions to a traditional 401(k) or IRA lowers your taxable income while simultaneously preparing for the future. For 2026, the 401(k) contribution limit is set at $24,500, while the IRA limit is $7,500. There are higher limits for individuals aged 50 and above. By decreasing your taxable income, you may qualify for various credits and deductions that phase out at higher income levels, which also means you keep more of your money away from taxes altogether.

Business owners often face larger tax bills, but options like Solo 401(k)s and SEP IRAs can be beneficial. If you already have one of these accounts, bumping up your contributions by just 1% or 2% could significantly reduce your taxable income next year.

Medical and dependent care accounts can also cut your taxable income, but keep in mind they aren’t one-size-fits-all. Health Savings Accounts (HSAs) let eligible folks with high-deductible health plans contribute money pre-tax for medical costs, which also offers additional tax benefits, like tax-free withdrawals for medical expenses. The 2026 HSA contribution limits are $4,400 for individual plans and $8,750 for family coverage.

Flexible Spending Accounts (FSAs) for health-related expenses can help reduce your taxable income as well, with a contribution limit of $3,400 for health FSAs. However, HSAs and FSAs might not suit everyone. If you deal with chronic illness or high medical bills, high-deductible plans might not be the way to go.

Dependent Care FSAs can cover necessary child or dependent care costs, such as daycare and summer camps. The annual limit for dependent care FSA in 2026 is $7,500 for households and $3,750 for married couples filing separately.

If you anticipate spending around $3,000 on daycare this year, regularly contributing to a dependent care FSA to lessen your taxable income makes sense.

These days, keeping a shoebox full of receipts isn’t as necessary for most taxpayers.

Many go for the standard deduction, which for 2026 is projected at $16,100 for single filers and $32,200 for married couples filing jointly. If you don’t itemize and lack business income, meticulously tracking every expense likely won’t lead to breakthroughs.

However, if you do opt to itemize, run a business, freelance, or have investment income, solid documentation will be essential. Simplifying the organization of your records can be done by:

• Creating a dedicated tax folder in Google Drive or Dropbox and making a monthly spreadsheet to capture your income and expenses. Spending just an hour or two each month can do wonders.
• Using a receipt scanning app included in your accounting software. Solutions like QuickBooks and Expensify allow you to keep digital receipts organized and linked to specific expenses.
• Considering bookkeeping software like Wave, which features a free accounting system for tracking your finances.
• Trying QuickBooks Solopreneur, which helps organize transactions and connect your business accounts.

If you wait until next spring to reconstruct a year’s worth of expenses from memory, mistakes are almost guaranteed, and you might miss key deductions. Organizing now means you won’t be frantically searching for documents later at your tax appointment.

Commonly overlooked but important deductions and documentation include:

• Mortgage interest and property taxes: Often documented, but double-checking your records is wise, particularly if you’ve purchased property recently.
• State and local taxes: Itemizers may find themselves claiming the SALT tax credit. Be prepared with proof of state income tax withholdings, property tax bills, and any estimated payments made.
• Business mileage: Tracking this is crucial for business owners. The standard rate for business mileage in 2026 is set at 72.5 cents per mile. Logging details about dates, destinations, purposes, and distance traveled will help immensely.
• Home office expenses: Those self-employed need to substantiate the square footage dedicated to work at home.
• Supplies, Software, Subscriptions, and Professional Services: Small costs can accumulate, particularly for freelancers and small businesses, so staying on top of these is important.
• Child support and dependent care: It’s necessary to keep records if applying for care credits or using a dependent care FSA.

It’s generally advised to keep tax returns and the documentation for them for several years—typically, the IRS suggests retaining records for at least three years after filing, though some might need to hold onto them longer.

For those with regular brokerage accounts, there are straightforward steps to manage taxable income. One crucial aspect is how long you choose to hold onto your investments before selling.

Long-term capital gains tax rates apply to investments held for over a year and are typically lower than those for short-term gains, which depend on your tax bracket. Most people qualify for a long-term capital gains rate of about 15%, while individuals earning between $50,401 and $201,775 face a 22% or 24% tax on short-term gains.

Strategically selling underperforming stocks can also help balance out capital gains. If your losses outpace your gains, you might deduct up to $3,000 of those excess losses from your income each year. Even if you carry forward losses that exceed the limit, you won’t lose any of your profits, since they can reduce future tax burdens.

If you see some gains at the start of the year, it could be beneficial to cut some lagging stocks come fall. This is part of a strategy called “loss recovery,” helping to minimize any immediate tax hits.

Investors in cryptocurrency also have to keep a sharp eye on taxes. Anyone selling digital assets through a broker will typically need to file Form 1099-DA. Starting January 1, 2026, brokers will most often report the sale cost basis, making tax filing simpler.

That said, the reports provided may not always be complete, especially for assets transferred between wallets. So, investors should still track their purchase dates, cost basis, and history of transactions.

Life changes can often bring unexpected tax implications, so being aware of some dynamics is important. Here are a few considerations based on major life events:

• If your family is expanding: Explore credits and benefits related to children.
• If you take on more freelance or gig work: You’ll need to address quarterly estimated taxes and track your deductible expenses. Self-employed individuals typically pay taxes quarterly.
• If you quit your job or withdraw from your accounts: Be alert to Required Minimum Distribution (RMD) rules, or face hefty penalties.
• If you move: If your new location has state income tax, familiarize yourself with that state’s tax laws.
• If your dependent turns 17: Be aware that the child tax credit might no longer apply, so it’s crucial to plan accordingly.

To prepare for next year’s taxes, consider these actionable steps:

• Review your tax withholdings and adjust your W-4 as needed.
• If feasible, boost your contributions to traditional retirement accounts.
• If you qualify, think about using an HSA or FSA that aligns with your situation.
• If you freelance or receive self-employed income, keep a close eye on your deductible expenses year-round.
• Check your investment gains, losses, and holding period before divesting.
• Reassess your tax situation following any major life changes.
• If you’re earning from freelance work or gig jobs, see if quarterly tax payments are necessary.

Making these small tweaks could lead to significant savings down the line. If neglected, however, it might end up costing you when tax season rolls around next spring.