8 Tax Questions to Consider Ahead of Tax Season

It's never too early to prepare for tax season. Whether you're focused on lowering your income tax, planning charitable contributions, or simply want to avoid surprises, asking the right tax questions can help you make informed decisions. 

Considering these questions now can also help ensure you're not missing out on potential tax benefits. With that in mind, here are some of the most important tax topics to review as you plan ahead. 

Double-check your withholding and estimated tax payments to ensure you're not over or under withholding from your paycheck. 

Some people might think withholding too much is a savvy move, as it should make for a bigger tax refund. However, over-withholding can actually cost you. Remember: The IRS doesn't pay interest on the funds you withhold, so if you've withheld too much or overpaid your quarterly estimated tax payments, you've effectively given up a potential opportunity to generate interest or returns. 

Of course, withholding too little can lead to a large bill at tax time, as well as potential penalties and interest if the shortfall is too large—an unpleasant surprise if you haven't planned for it. 

A better approach would be to withhold or prepay just enough to match your expected tax obligation. You can always adjust when you get a clearer picture of your likely annual income as the year progresses. 

If you have the financial means, be sure to maximize your contributions to tax advantaged accounts and consider making your contributions sooner rather than later. Even though you have until year-end to make contributions to your 401(k) or Tax Day for your traditional or Roth IRA, making early contributions to your retirement accounts will give your money more time to benefit from potential long-term compound growth. 

Tax credits can directly reduce the amount of federal income tax you owe, making them especially valuable. Many taxpayers may qualify for credits such as the Child Tax Credit, the Earned Income Tax Credit, or education-related credits like the Lifetime Learning Credit. Reviewing your eligibility before you complete your tax forms can help ensure you're not leaving money on the table. 

If you're age 73 or older and have to take RMDs from your retirement accounts, you must do so before the end of the year. Otherwise, you may have to pay a 25% penalty on the amount not distributed. That said, if you correct the issue by taking your full withdrawal, the IRS may lower the penalty to 10%. 

If you turned 73 this year, you have until April 1 of next year to take your first RMD. However, if you wait until next year to start your RMDs, you'll have two distributions in the same year, which could make for a much bigger tax bill. 

If you're charitably inclined and don't need the RMD for your living expenses, consider making a qualified charitable distribution (QCD) from your IRA directly to your favorite charity. You can use a QCD to donate up to $108,000 for 2025 and it won't be included in your adjusted gross income (AGI). 

If you're planning to sell any investments, know your cost basis before you do so. Managing your cost basis can help you save on taxes. 

Your cost basis is essentially what you paid for an investment, including brokerage fees and any other trading costs. The size of any capital gain (or loss)—on which your tax obligation will be based—is the difference between the asset's cost basis and the sale price (i.e., what you sold it for minus what you paid). In a simple transaction, the cost basis should be easy to calculate. 

However, if you buy the same investment over time—such as through a dividend-reinvestment plan—each block of shares purchased is likely to have a different cost basis and holding period. In these situations, you can pick which shares to sell, giving you the ability to sell the ones that will have the least tax impact. 

Alternatively, you can go with the default method, which generally requires less effort on your part—but could cost you more in federal taxes. Unless you specify otherwise, Schwab uses the "first in, first out" (FIFO) cost basis method as the default method for determining which assets were sold. 

Here is an example of how being selective with your cost basis can matter during tax season: Imagine you accumulated 1,000 ZYX shares at various prices over several years, and then sold 100 of them today, when prices are at an all-time high. With the FIFO method, you would be selling your oldest shares first. Assuming you bought the oldest shares at the lowest prices, the FIFO method would lead to the largest capital gains and therefore the biggest tax obligation. 

Make sure your assets are located in the most tax-efficient investment accounts. 

For example, a regular taxable account can be a good place to hold tax-efficient investments—such as stocks or funds that pay qualified dividends, municipal bonds (for those in higher tax brackets), and most index funds and ETFs—as these assets tend not to generate a lot of taxable income. (Before considering any fund, you should consult the fund's prospectus to understand its investment objectives, risks, charges, and expenses.) That said, timing matters. Holding such investments for over a year means any gains you make from selling will be taxed at the long-term capital gain rates, which are generally lower than the ordinary income tax rates. 

Investments you plan to hold for short term (for a year of less) tend to work better in tax-advantaged accounts, such as a 401(k), IRA, or Roth IRA, since those gains are taxed at the higher ordinary income tax rates. Tax-advantaged accounts are also a good place for actively managed mutual funds that may generate significant short-term capital gains, and corporate bonds that pay interest income. 

Assets that you expect will appreciate the most tend to make sense in Roth IRAs and Roth 401(k)s, as potential earnings in such accounts can accumulate tax-free, and qualified withdrawals are also tax-free once you reach age 59 ½, so long as you made the first contribution to the account more than five years ago. 

Of course, tax-efficient placement presumes you have different account types. If most or all of your portfolio is in tax-deferred accounts, you'll really only need to focus on your asset allocation strategy. 

Concentrating your donations within a single year can help you maximize your itemized deduction for that year. The next year, you can switch and take the standard deduction, which could increase your overall deductions for that two-year period, resulting in a large tax benefit. 

In addition, if you're charitably inclined and planning on selling a significant amount of long-term appreciated stock, which will generate a large taxable gain, consider donating a portion of those assets directly to a charity, rather than selling them. Subject to certain income limitations, you could get a tax deduction for the full fair market value of the donated stock and you won't have to pay taxes on the gain for those shares. 

Many charities are unable to accept gifts of appreciated assets—like stocks or mutual funds—but you can use a donor-advised fund, which is another great tax tool to facilitate the donation process. When you make an irrevocable donation to a donor-advised fund (DAF), you can potentially get the full deduction for the charitable gift that year, assuming you itemize your deductions and meet the income limitations. The DAF will then become the owner of those assets and you can recommend grants to eligible nonprofits over time.

Even with careful planning, tax law can be complex. If you're self-employed, run a small business, or have multiple income sources, doing your taxes may require more than standard tax software can provide. A qualified tax expert can help you simplify your filing, make tax preparation more efficient, and ensure you're taking advantage of all benefits. 

Answering these common tax questions can leave you better prepared for tax season and potentially a more manageable tax bill. By making tax planning a year-round exercise, you'll find it easier to check your progress, update your plan and, if necessary, take action long before the tax-filing deadline.