What's the best time to plan and get ahead of your annual taxes? Midyear or during the month of July, you can already project your income for the next six months since you have the idea of your earnings from January to June.
Why You Should Look at Your Taxes Now
Planning is better than doing nothing at all with your revenue taxes. We all know how time consuming and costly it will be if you wait until December comes. Think of the many advantages if you estimated your earnings and the taxes you will incur from it now. First, it will give you time to evaluate on cost, which you can include as deduction, income you have not included (but you know will be checked by the IRS), adjustments for previous year overpayment, remedies, and the estimated taxes you will be paying.
Check Your Earnings
If you are an employee, take hold of your earnings and do not depend too much on your employer to do the math for you. A simple analysis of your compensation or paycheck will enable you to evaluate your earnings and the taxes deducted against it. The IRS has a withholding calculator you can use to determine whether you need to submit form W-4 to your employer. The purpose of which is for your employer to deduct the correct tax based on the adjustments you had for the year such as:
• Concurrent employment
• Change of status like single to married or head of the family
• Eligibility for child tax credit
• Spouse is working
There are several ways to reduce your tax as well, since you have enough time to evaluate these things before the year ends by way of charity contribution and pre-tax retirement contribution. And you can even dig more of tax saving measures to reduce your tax liability for the year.
Those who have earnings from investments aside from their employment have many things to consider as well. Although you can always rely on your accountant to do the math for you, it's still your decision as to the costs and expenses you have incurred for the year to give your accountant an overall picture of your tax liability. You can even do your own calculation to aid you in budgeting for your tax due.
• If you are investing in the stock market, expectedly you have gains and losses from the changing value of your stock investment. The tax for gain on sale of securities held more than a year is less than 15%.
• Securities sold at a loss don't necessarily mean a deduction on your revenue if you buy the same securities within 30 days from the day it was sold.
Self-employed persons are more prone to suspicion from the IRS because of the possibility of unreported income. If you are a freelancer and you control your own revenue, you need to think of ways to protect yourself from possible scrutiny from the IRS. There are three things or possible scenarios where the IRS would be suspicious of your declaration; these are the following.
• Have high wages and huge business loss
• Business losses year after year
• Lower income compared to the standard in the profession
If you have evaluated and reviewed your revenue during the middle of the year, you can plan the things you need to take actions about before drastically making tax measures to reduce your taxes. The advantage with self-employed individuals is that their income is not taxed automatically in the payroll, but they have the option to pay periodically their taxes based on best estimate.
Simple Tips for Tax Planning
The best way to plan your tax is to apply the following simple tips.
• Organize your records. It's the first thing you must do to make your calculation. It means you have to keep track of all your revenue and expenses.
• Review your status (additional child dependent, spouse is already working, availed of retirement plan, becoming head of the family, gaining or losing investments, charitable contribution, and so on)
• Be efficient and do some research. You can always find tips on how to review your taxes by researching or seeking the aid of some experts if you have doubts about some costs and expenses that you think are necessary to be deducted from your revenue.
• Don't be naïve. The law excuses no one, so make sure you have declared or cut your taxes on legal grounds and bases. Tax saving is different from tax evasion.
Midyear planning and organizing keeps things easier for your budget. It will help you as a tax saving measure and project your cash flow for the next six months.
Jessica Bosari is a freelance writer and blogger for various publications and her own blog. You can read more of Jessica's work here. If you have any comments or questions about SavingTools or about saving money, leave your comments in the form below or email firstname.lastname@example.org. Thanks!