It’s tax season.
How are you feeling?
Are you prepared and confident that you have paid in enough income taxes through the year so that any additional tax you might owe will be a small manageable amount?
Or are you dreading the result of your income tax calculation, unsure whether you may have a big tax bill that will be a burden to pay?
If you dread the tax season, never seem to know whether you will have income taxes due, and, worse yet, scramble to come up with the payment before April 15th, here are steps you can take now to avoid a big tax bill next year.
Do this now (yes, now!):
Before you leave your tax expert’s office with last year’s results, talk about this year’s tax situation.
Estimate the amount of any pay raise and/or bonus you expect to receive during the year. This additional income may push you into a higher tax bracket.
Estimate your deductible expenses for the current year. Will they likely be the same, higher, or lower than last year? For example, if you made a contribution to a charity last year which you do not intend to make this year, you may have fewer deductible expenses to offset income.
Allow your tax expert (CPA, tax attorney, the person you trust to prepare your tax returns) to guide you through income and deductions to identify what may be different.
If the estimated result of increased income and/or decreased expenses is likely to push you into a higher tax bracket, you may need to adjust the amount of income tax withheld by your employer. It’s up to you to be sure that your employer(s) withholds enough income taxes to cover your liability. The tables used by an employer to calculate your income tax withholding assume that the income you receive from that job is the only taxable income you will receive for the year. If you have two jobs, or if you are married and your spouse also is employed, then it’s very likely that the tax withholding calculated by each employer individually will not be sufficient to cover your income tax liability from all of them.
Work with your tax expert to determine what percentage or dollar amount of your income should be withheld by each employer. Then request that the employer make that change.
Do this throughout the year when something changes:
Notify your tax expert of any unexpected changes to your income or deductible expenses. These might include a promotion, job loss, sale of home, relocation, retirement, etc.
Do this by December 1st:
Do a final projection of the year’s income and expenses, and meet with your tax expert. This will allow him/her to advise you about options that might be available to you – increase tax-deductible expenses, delay income to the next tax year, or prepare for any additional tax that might be due.
If you are a do-it-yourselfer, you can still take the steps outlined above. Enter your estimates for this year into last year’s tax program to get a ballpark idea of what the outcome might be. Remember that this year’s tax tables will be different. Consider the value of consulting with a tax expert to insure you are on the right track.
And, remember – keep your financial advisor in the loop. Communication and coordination between your tax expert and your financial advisor will improve your results. Together they can coordinate strategies and implement actions that 1) keep your spending and saving goals on track and 2) minimize the impact of changes in your tax liability.
Note: This is not tax advice. This is a plan for how to avoid that empty feeling in the pit of your stomach next tax season – stay in touch with your tax expert throughout this year and follow his/her advice so that you’ll be prepared, not surprised.
Here’s to a tax season for you next year with no surprises!