It’s that time again; when you fret over how much you’ll owe the IRS. Even though your paychecks feel like they’ve been obliterated all year by withholdings, you may be unsure as to whether or not that was enough. There are specific reasons you may not get any money back this year. The good news is most of them are under your control. Have a look:
- You didn’t contribute enough to your 401(k). If you are making pre-tax contributions (not Roth), every dollar you defer lowers your taxes owed by the product of that dollar and the factor of your tax rate. In other words, if you are in the 25 percent federal tax bracket, a $1,000 contribution lowers your taxes owed by $250. Of course, don’t contribute more if it will make you cash poor. The question to ask yourself is, “Do I wind up spending more money on things I don’t need because it winds up in my checking account?” If the answer is yes, you might consider increasing your deferral rate and decreasing your tax bill.
- You didn’t utilize your employer’s FSA. Your employer may offer accounts in which money goes in pre-tax and comes out tax-free (as good as it gets)! These accounts are typically designed to fund qualified medical expenses. Speak with your benefits department if you haven’t taken advantage of these programs. Just beware of the year-end “use it or lose it” features.
- You changed jobs and didn’t pay attention to your withholdings. This is the biggest root cause of sticker shock come tax time. You simply haven’t paid what you owed. Pay close attention to how many exemptions you claim when starting a new job on your form W4. Not all payroll companies equate exemptions to withholding percentage the same way, so you may be wise not to claim too many exemptions in year one. You won’t necessarily pay more than you would have (unless you owe penalties) but you may interrupt your April cash flow or find you’ve already spent your tax payment on that trip to Jamaica.
- You keep crummy records. Keep a file labeled “Taxes” this year and keep one every year. When you contribute to charity, donate something, pay a professional fee, pay a medical bill, pay property taxes, etc., throw the receipt in the folder. Financial aggregation software, such as the type we offer our clients, can be an even better solution. Don’t leave deductions in the trash!
- You chose the wrong filing status. After divorce, marriage, or death of a spouse, your filing status may change. It may be best to leave it unchanged for another year. It may be better to use “head of household”. It makes sense to check with a CPA when big changes come your way. While a certain filing status may seem to please your ex-spouse, it may cause you to miss out on grants or education credits. There are countless examples of why filings status should never be taken lightly. Don’t assume what your golf buddy told you is right. Seek professional guidance.
With all of the above being said, doing everything in your power to pay as little as possible in the current tax year is not always the correct course of action. The goal is to pay only as much as we owe over our lifetime. Tax rates change over time. If you aren’t happy with your tax refund this year, consider scheduling a complimentary meeting with us. As with investing, a long-term approach should also be taken with your tax planning. Although we are unable to provide legal or tax advice, we can work with your current attorney or tax professional to dispense the appropriate guidance for your individual situation. Additionally, we have the ability to call our own partner experts to ensure the necessary information is provided in the process of offering sound guidance.
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