Prepare Now for Next Year’s Tax Bill
Reviewing your taxes should be an on-going habit to manage next year’s income tax liability and to discover any surprises.
Looking over your taxes and finances in Summer generally still leaves you time to adjust and implement strategies to improve next year’s filing.
This is especially recommended if you’ve had a big life event or if you expect a life change by the end of the calendar year. If you’ve had a marriage or a divorce, a birth or a death in the family, bought or sold a home, or a raise or a new job, your tax liability could be very different for this year’s income tax filing.
1) Review your W-4
When you started your current job, you filled out a W-4 form to instruct your employer how much to withhold from your paycheck for taxes.
It’s good to look at the withholdings a few months into a new job and twice a year going forward. If you’ve had a major life event such as getting married, having children, or buying a house, it’s especially critical to check-in on your expected tax liability and update your W-4 to have the appropriate taxes withheld. You want to make sure you are withholding enough, and not withholding too much.
If your tax withholdings aren’t on track, there’s still time to adjust withholdings or estimated payments.
2) Contribute to 401(k) or IRA
If you have room in your budget, contributing to pretax retirement savings 401(k) or a traditional IRA will decrease your adjusted gross income. This can reduce taxable income which can ease your tax liability.
(A Roth 401(k) or a Roth IRA are taxed upfront and do not lower adjusted gross income.)
3) Check Taxes Owed on Side Hustles or Unemployment
Any income you’ve made from a hobby or a side hustle is considered taxable income. Any unemployment payments you may have gotten are also subject to income taxes.
4) Sell your losing stocks
If you own stocks, you likely have at least one that isn’t performing well. If you sell your losing stocks for a capital loss, that capital loss can be used to offset any capital gains. This is a strategy called tax-loss harvesting.
If you don’t have capital gains, the losses can offset up to $3,000 of ordinary income. Losses beyond the $3,000 max, can carry over to future years.
Avoid Tax Surprises
Don’t wait until April. For help with your income tax planning and preparation, taxes, give us a call.