If you asked people to name some of their least favorite tasks, doing their taxes would often come up high on the list. The pressure of finding out what you owe or if you get a refund and the drudgery of gathering all your receipts and coming up with deductions is an annual event that leaves many people stressed and frustrated. When you add the complexity of new tax forms it’s almost enough to push people over their limit.
In order to take some of the stress out of the typical tax preparation process, experts recommend that you take the time to do tax planning before the tax year ends. An online tax calculator can be used to help estimate your tax refund and see how various deductions and credits would affect the amount of money you will get back once you file your taxes. If it looks like you will owe money, you can also use online tools to help analyze your tax withholding levels so you can minimize or eliminate owing money at the tax deadline.
Standard vs. Itemized Deductions
In recent years the standard deduction has increased and as a result some 90% of taxpayers now take the standard allowance instead of itemizing their deductions. If you have a lot of deductions you can use the tax estimate calculator to model what if scenarios related to the current tax year. For instance, you can project and see if your itemized deductions would exceed the standard amount.
If they do you can use a strategy of accelerating your deductions to bring even more of a write off into the current tax year. By paying an extra mortgage payment before year end, prepaying property taxes or moving up charitable deductions you can push deductions into this year. The tax calculator will walk you through a variety of tax categories so you get a picture of what you will owe or receive as a refund. As part of your tax planning you can also research ways to get a bigger tax refund.
Take a Look at Retirement Accounts
One of the best ways you can save on your taxes is to make a contribution to your retirement account and claim up to a $6,000 deduction. If you are over 50 years of age, the deduction limit goes up to $7,000. As an incentive for funding your future retirement, you may also find that you qualify for an additional saver’s credit which increases your tax deduction.
On the flip side, you have to be really careful about taking money out of your traditional 401(k) or IRA accounts. In general withdrawals from these accounts are added to your income for the current tax year and can greatly impact how much you owe because of taxes on your extra income. These scenarios may also move you into a higher marginal tax bracket.
The best way to save money on your taxes and get a bigger refund is to do careful in-year tax planning. Analyzing your taxes before the end of the year allows you to make adjustments and implement strategies that will directly improve your financial situation.