Well folks it’s almost that time. April 15th is this coming Tuesday! Tax time can be stressful for some people especially when you have an unexpected tax bill. Due to the constantly changing tax laws, every year more tax filers are owing tax at the end of the year.
I usually find that tax filers who have had a change in dependents, who are newly married or divorced, those who have had significant changes in income during the tax year and the self employed are most often the ones who run into this issue.
Fortunately there are some simple things you can do now to help lower or eliminate your tax bill.
1. Keep the information on your W-4 current. If you have a child graduate from college, move out of the house, or if you have another person was your dependent who dies or has a change in their dependency status, you need to make changes to your W-4 to reflect the differences. It’s not something most people think about, but it does make a difference. The withholding amounts on your paycheck need to accurately reflect your life. If you take more exemptions on your W-4 than you can claim on your 1040, you will most likely have a tax bill.
2. Self employed persons should keep track their net income through out the year. If you see you are making a profit (which is why you’re in business), start making tax deposit through out the year. This is most easily done through EFTPS.gov. On average you should deposit 10-25% of your net profit to avoid a large tax bill and underpayment penalties at the end of the year.
3. If you are self-employed you need to keep a written record of all of your business expenses. This should include some kind of ledger, receipts, bank statements and any other source documents that will verify your income and expenses. Don’t leave money on the table because of sloppy or non-existent financial records in your business. Mileage is one of the most common deductions I see business owners miss out on. You must keep written records of your business mileage and vehicle expense. No records = no deduction.
4. The same advice goes for employees who have unreimbursed job expenses including mileage. Keep your records. If your employer has a program that reimburses you for job related expenses, use that. If they do not, keep records and deduct these on your tax return.
5. Help yourself by helping someone else. Charitable contributions to churches and other qualified non-profit organizations are also tax deductible. Again, you generally must have written records of your donation in the form of a receipt from that organization. Be aware that donations to non-qualified organizations and individuals are non-tax deductible gifts.
6. Pay yourself. There are deductions and credits available for saving for the future. The future may include college or retirement. Either way, savers are rewarded for their efforts, provided they use the right instruments.
These are some of the most commonly missed opportunities I see that can reduce or eliminate that dreaded end of the year tax bill. It just takes some awareness and a little effort to make it happen.
Call me for help implementing a plan for this year.