For many of us, April 15th is a day that is loaded with fear and treachery. What’s more, some start feeling this sense of loathing the minute that our W-2s or 1099 forms hit our mailbox. For we know these slips of paper mean that it’s time to do our taxes, which may mean taking a trek to the great unknown. This sense of the unknown is marked by several questions. Will I owe money this year? If so, how much will I owe? If I owe a lot, how will I pay? These inquiries are enough to make anyone fear the process.
Yet these questions and the sense of intimidation that oftentimes come with it can be mitigated through the implementation of specific tax planning strategies. A good tax planning strategy will give you better control of what goes to the taxman and what comes back to you when April 15th rolls around. Obtaining this sense of control does require some due diligence, but it also will help you sleep a whole lot easier.
It’s Never Too Early to Start Planning
Because filing taxes only happens once a year for most of us, there is a tendency to not think of the process between the time taxes are filed and the time year-end tax forms are mailed out. Yet it is essential to sit down in the middle of the year to take a long, hard look at how your current financial situation will affect your tax return the following year. Some of the things that you should particularly scrutinize are your number of withholdings and a double-checking of your tax bracket. These two steps will go a long way into making sure you are contributing a proper amount throughout the year. Even if this analysis leads you into bumping up your federal and state taxes, you should keep in mind that paying a little extra per paycheck is significantly better than paying a lot in mid-April.
Control Your Tax Bracket as Best You Can
It’s simple math: The higher your taxable income, the higher your tax bracket, which means you’ll potentially be on the hook for more taxes. This metric affects anyone that may be on the precipice of jumping from one bracket to another, as such a leap may be met with devastating effects if not prepared. As such, it may behoove you to implement strategies to lessen the amount of taxable income that gets reported at the end of the year.
Obviously, this doesn’t mean that you walk into your boss’s office and demand you receive a pay cut. However, this does mean that you can plot ways to turn some of your taxable income into funds that are not considered taxable. Some of the more effective ways that you can do this include increasing your retirement contributions, putting funds in non-taxable investments, and providing gifts to charities. The latter tactic is a particularly good one to implement, as you’re essentially helping your bottom line while you help others that may not be as fortunate as you.
Enroll in Tax-Friendly Health Services
One of the biggest ways you can potentially help yourself come mid-April is by taking a thorough look at your healthcare coverage. Specifically, if you find yourself earmarking a lot of money for out of pocket medical expenses, then it would behoove you into either a flexible spending account (FSA) or a health savings account (HSA).
These services allow you to cover medical expenses throughout the year using tax-free dollars; up to $3,300 per year for yourself and up to $6,550 per year for your family. Since the money gets automatically funneled into the respective plans, they are deducted from your taxable income, which could help keep you from landing in a higher tax bracket. And while these respective services used to be attached to a “use it or lose it” year-end policy, you are now allowed to rollover up to $500 from you plan into the next year.
Adjust Your Withholding
It’s fun to be able to get a huge chunk of change from the government after you file your taxes - if you’re lucky enough to be in such a position. Yet it should be noted that the best possible tax filing outcome from a pure taxation standpoint is for you to be as close to $0 owed or due as possible. Getting the goose egg may not carry the same excitement as getting a refund, but it also means that you will have received the most accurate net pay possible throughout the previous year.
The best way to get to this neutral number is to manipulate the number of withholdings listed on your W-4 form. An increase in the number of withholdings would increase your net pay, while a decrease in the number of withholdings would decrease the take home pay. You don’t have to go about this process blindly, either - there are several online tools available that could help you how your check - and ultimately, your taxation - would be affected with each withholding increase or decrease.
Find a Trusted Tax Preparer
Taxes are tough to figure out on your own, even if you have a ton of business savvy. That’s why it is so important that you seek out a quality tax preparer or CPA to help put together your taxes. A trusted tax preparer will pick up on things that you may miss or gloss over, like certain deductions or write-offs. This level of expertise could mean the difference between you owing money and you getting a return. Obviously, you’ll have to pay for their services, yet the cost of using a tax preparer that knows what he or she is doing is a small price to pay if it prevents you from seeing your taxes land in the red.
An Ongoing Process
The art of tax planning isn’t something that can be executed in a few hours. It’s something that needs to be in constant flux in order to be as effective as possible. By keeping abreast of your financial situation and it may affect your taxes, you will be able to eliminate the worry that oftentimes comes with tax preparation and filing. You may even end up looking forward to the process.