Mid-year is a good time to check your income and taxes withheld to date. If you received a refund or owe money and have not made any adjustment yet, you should make the adjustment to withhold more or less as needed. A large refund represents an interest free loan to the IRS, and a large amount owe could become a financial liability that could cause you even more money and negatively affect your credit score if you are unable to pay.
If you received a large refund previously, consider withholding less money and divert the money to an interest-bearing account, use it to pay off debt, start an emergency fund, or contribute to your long-term investments, such as a tax-deferred retirement plan. If you owed money, or expect a significant increase in income this year, consider withholding more and adjust your budget accordingly.
You can change you Federal and local tax withholdings from your paychecks at any time during the year by filing a new W-4 tax form and/or the equivalent state and local forms with your employer. It can even be changed more than once during the year.
Ultimately, your goal should be trying to break even when all is said and done.
Additionally, here are some additional strategies that you can leverage to reduce your tax burden.
There are several ways for you to reduce your taxable income, such as, donating to charities, contributing to an IRA and/or a 401(k), etc. If you have not started, or you are behind your plan, now is the time to ramp it up so that you have enough time to do these things.
If you have access to an employer-sponsored 401(k) plan, you should contribute up to the pre-tax maximum contribution each year. This helps to reduce your taxable income and gives your retirement savings a nice boost. If eligible, you could also contribute to a Traditional IRA for even more tax savings.
Do not wait until the end of the year to start organizing your tax documents. Start a file now if you have not done so already and make sure that you accounted for everythign since the beginning of the year. If you wait too long to organize your paperwork, you may forget what you spent money on, or how you paid for it.
There are two things to consider regarding your medical expenses. If you contributed to a Health Care FSA, evaluate whether or not you will be able to use up the allocation before the deadline. If you are not on track to use up the allocated fund, your money could be lost and you might want to plan the necessary medical and dental procedures accordingly.
Another factor to consider is the itemized deduction for medical expenses. Your eligibility to deduct these expenses is based on a certain percentage of your gross adjusted income. If you are going to be close, you might want to plan your medical and dental procedure so that you can take advantage of the write-off.
These are just a few ideas to help you plan better for the tax time. There are other ideas that could help you reduce your tax burden and be more prepared for tax filing. Do your research now and save some money down the road.
If you have other tax planning ideas, be sure to share them with us below.
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