Smart tax planning happens all year round. Here are four things you can do this summer to improve your standing when tax time rolls around again.
Smart tax planning happens all year round, not just the day before the tax deadline. Here are 4 things you can do this summer to put you in a much better position when tax time comes around again.
1. Revisit your W-4 withholding
Most people have far too much tax withheld from their paychecks, as evidenced by the billions of dollars in tax refunds the IRS hands out every year. While over-withholding might give you a nice windfall at tax time, it also means less money in your pocket every payday.
- Properly adjusting your W-4 withholding can put more money in your pocket now, without resulting in a huge tax bill by the filing deadline.
- You won't get the large refund you may be accustomed to, but you won't be loaning the IRS your money and waiting until tax time to get it back either.
- Your employer can provide you with a new Form W-4 at any time.
- Keep in mind it may take a few weeks for your new withholding to take effect.
2. Increase your 401(k) contribution
A 401(k) plan allows you to contribute part of your cash wages to a retirement plan on a pretax basis. These deferred wages are not subject to state or IRS tax withholding and are not reported on Form 1040. The result? Your taxable income is effectively lowered by the amount you contribute (within certain limits).
- You can contribute up to $19,500 for 2020 and,
- If you are 50 or older, you can stash an extra $6,500 in catch-up contributions for a total of $26,000.
Every dollar you contribute to the plan escapes IRS and state income taxes. If your combined federal and state income tax rate is 30%, for example, you save $300 in taxes for every $1,000 you contribute to your 401(k), while saving for the future.
Some employers offer matching contributions, maybe 50 cents on the dollar for the first 3% of your salary that you contribute. If your boss is one of them, make sure you contribute at least as much as needed to capture your employer's match. Otherwise, it's like walking away from free money.
3. Pay your 2nd-quarter estimated tax payment
Avoid end-of-year tax surprises or IRS penalties. If you are self-employed, have side income or have any other second-quarter income that requires you to pay the IRS quarterly estimated taxes, get them postmarked by June 15. Not sure if you owe? Learn more about estimated taxes.
4. Carefully track your charitable donations
Keep better records of the items you donate to charity this year, so you can get the biggest write-off possible at tax time. Noting every item you donate (instead of "one bag of clothing," for example) may seem like a lot of work, but it will pay off at tax time by giving you the biggest IRS tax deduction possible.
TurboTax Deluxe, Premier and Home & Business have ItsDeductible built right in, which gives you accurate valuations for all of the items you donate to charity. You get the biggest tax deduction for your donations and comply with IRS guidelines.
Many users of ItsDeductible discover they've been undervaluing their charitable donations and get a bigger deduction than they expected.