Tax time is just around the corner, and with it comes decreasing bank accounts for many people. Indeed, tax season is a dreaded time of year for those who almost always end up with a bill. There are many reasons a person might owe the federal government money come April, and while it’s too late this year to do much about it, if you follow the tips below, you just might be able to break even – or get a refund – next year.
1. Use a Tax Calculator
The best way to get an idea of how much you owe the government is to take advantage of a comprehensive tax calculator. Online tax calculators use your basic financial information and the current tax rates to estimate your tax refund or tax debt for the year.
Armed with this data, you can discuss your W-4 with your employer. You can also adjust your contributions to retirement and savings accounts to lower your tax obligation for the rest of the year. Remember that the figure you get from a tax calculator is an estimate, not the amount you will definitely owe or get back.
2. Have More Withheld from Your Paycheck
If you paid into the federal government in previous years, tweaking your W-4 with your employer should reduce the amount you have to pay come tax time. You can change your W-4 form with your employer at any time.
In general, the more dependents you claim, the less tax your employer withholds from your paycheck. While this gives you more money during the year, it might cause you to owe the government money at tax time. Changing your W-4 to claim fewer dependents will tell your employer to take out more in taxes, so you’ll hopefully get a refund at the end of the year.
3. Complete a Sample Tax Return
A sample tax return will give you the most accurate picture of your tax liability, but it will also take extra time. If you choose to do this, be sure the tax software or forms you use are for the current year, as previous years’ documents won’t include any changes to the tax rules or rates for the current year.
4. Itemize – Don’t Take the Standard Deduction
Many taxpayers take the standard deduction because it’s easier. You don’t need receipts, nor do you need to list your deductions individually on your tax forms. While the standard deduction is more convenient, itemizing your deductions could reduce your tax liability.
You can deduct all kinds of things, from medical bills to charitable donations. Your mortgage interest is even deductible. Deciding whether to itemize or take the standard deduction is as easy as comparing the sum of your deductions to the current year’s standard deduction. Don’t just assume the easy road is good enough – do the math!
5. Leverage Your Retirement Plan to Save Money
Putting money into your retirement fund (401k, for example) will protect your money from taxation – for a while. For example, if you contribute $19,000 to your 401k during the year, that money is not taxed and is deductible on your tax return. With that said, nothing comes for free, so when your retirement fund begins paying out, any money you receive from it is considered income and must be reported on your tax return.
Not many people look forward to the end of the financial year, but if you want to lessen the shock value of paying into the federal government, follow the tips above to reduce any tax liability you may have.