Summer is a good time to review your current year tax situation and maybe prevent a big surprise come next April. One way to do this would be to check your tax withholding. Have you ever wondered why you got a larger refund or owed a larger amount than you expected? Then reviewing your withholdings during the summer might be able to prevent the surprise.
See Publication 505 on IRS.gov.
The Internal Revenue Service identified four categories that can directly affect your withholdings. They include:
- New Job. Everyone knows that when you start a new job, you’ll be asked to fill out a Form W-4. Your new employer will use the information you provide to determine your federal income tax withholding for each paycheck. If you need help completing your W-4, call us or try the IRS Withholding Calculator.
- Estimated Taxes. If you earn income that is not subject to withholding, such as self-employment, interest, dividends or even rent, you may need to pay estimated taxes, usually on a quarterly basis. We can help you determine whether estimated taxes are owed or you can find the IRS online worksheet at Form 1040-ES to determine this on your own.
- Life Events. A marriage or divorce, the birth of a child, or the purchase of a new home can change the amount of taxes you owe. It’s a good idea to review income tax withholding and/or estimated taxes following a life event.
- Retirement Plans. An effective way to decrease your taxable income while saving for the future is a retirement plan. The most common is a 401(k) which allows you to save for retirement while reducing your current year taxable income based on the contributions you make. If you don’t like the idea of pre-tax money going to retirement you can make contributions to a Roth IRA which are after tax contributions. Taxpayers may also qualify for the Retirement Savings Contributions Credit or Saver’s Credit based on their income. In 2015 a single taxpayer who’s adjusted gross income is less than $18,250 can get a credit of 50% of their retirement contributions.
Tax Planning: If you haven’t already done your tax planning for next year, the summer is a great time to meet with your CPA. There is still time left in the year to make adjustments to use the ideas above to make incremental changes so that December or April aren’t dramatic for you.
Record Keeping: The summer is also a good time to make sure your prior year tax records are up to date. It is always a good idea to keep copies of prior year tax returns because you never know when you might need them. Some examples include if you need to file an amended tax return, if you are applying for a loan or a mortgage and you may need them to apply for financial aid. If however you can’t find the prior year’s tax returns you can request a transcript (IRS Transcript Service) or copy from the IRS.
A tax return transcript is a summary of the tax return that you filed and is free. This can be done online using the online transcript service. If you require a complete copy of your tax return, KMM clients can always contact us. Anyone inclined to request their own copy can use Form 4506 and mail it with a check for $50 per tax return.
Written by: David Espanet