You have filed your 2014 tax return and now it’s time to plan for next tax season. You either received a refund or you owed money. Do you ever wonder why your friend is always receiving a sizeable refund every tax filing season and you are hit by underpayment penalties on top of additional tax owed to the IRS? It may be time for you to review your withholding.
If you owed money in 2014 and you were not self-employed, chances are that you might not be withholding enough tax from your paycheck. On the other hand, if you received more than a thousand dollars in refund, you are probably withholding too much and could be getting a larger take-home check. In addition to taking a larger check home, you are probably missing out on the compound effect. Your employer withholds tax based on the information you have provided on your Form W-4 (Employees Withholding Allowance Certificate). The more allowances you claim on Line 5, the less tax your employer withholds. The fewer exemptions you claim, the more tax is withheld.
To avoid the same situation every year, you might adjust your income tax withholding on Form W-4 you submit to your employer, if you are an employee. If you are self-employed you can minimize the tax burden through quarterly estimated tax payments. But the million dollar question is: How much should you withhold?
The IRS is making it easier for taxpayers to calculate their estimated withholding amount by providing a withholding calculator on their website www.irs.gov to help you minimize the guess work.
Some taxpayers may still prefer to withhold a lot and benefit from the refund come tax filing season because they believe that is the best way to help them save, this is actually giving the government use of your funds interest-free.
There are other ways to help you plan for next tax season and reduce your taxable income, such as:
- Increasing your retirement contributions. This will also reduce your taxable income which reduces your tax bill. Plus some employers will match your contributions. By investing early you are taking advantage of the compound effect.
- If you have a high deductible health plan, make HSA (Health Savings Account) contributions through your paycheck.
Plan ahead and seek advice.
