Monday, July 4, 2016

How to save money on next year’s tax bill — by making changes now

It's inevitable — the day on the calendar every year when you will have to file your income tax returns. It's a day you dread because you know you will owe taxes.
Your accountant has assured you that you are taking advantage of all the deductions and tax credits you are eligible for, but you will still owe money.
As you write the check to the United States Treasury or to your state tax department, you promise yourself you will not let this happen again next year. Instead, you will increase the amount of tax you pay throughout the year so come next April you won't owe so much.
You may even toy with the idea of paying in a bit more than your accountant recommends so you may wind up with a small refund. Emotionally this may make you feel better.
Fast forward two months later and chances are you still haven't increased the amount of tax you are paying.
Summer is approaching; your vacation is imminent (so is the final bill for the airfare) and the last thing on your mind is paying more taxes.
So, what should you do?
The first thing would be to check with your accountant and see if there are any additional deductions or tax credits you may be entitled to this year. Tax laws are always changing, and they may affect your personal tax situation.
Getting a head start on tax planning for 2016 is a good idea and you may find that you can save some money on taxes due to these changes.
If you have taken advantage of all the tax breaks, then you may want to change your withholdings now and spread out the additional amounts over the rest of the year. This will reduce your take-home pay, which no one likes.
However, for many, it is easier to do this then come up with a lump sum next April or try to put aside money each pay period to pay taxes.
An advantage to paying all the state tax through withholdings before the year ends is that it may also reduce your federal taxes if you itemize your deductions (and are not subject to AMT tax).
Finally, you may decide that you'll pay all or most of it on April 15 of next year. If that's the case, be aware that the IRS and your state tax department may impose a penalty for underpayment of taxes.
To avoid an underpayment penalty, the amount of tax you owe for the year must be less than $1,000 (after subtracting withholding and estimated taxes), or you must pay at least 90% of the current year tax or 100% (110% for higher income taxpayers) of the prior year's tax.
The determination of an underpayment penalty for state income taxes varies by states, although state guidelines typically are similar to the IRS.
Any way you decide to handle it, it is always best to know ahead of time whether next April will bring you comfort in knowing your tax liability has been previously satisfied or leave you scrambling to find the funds needed to pay your taxes.