By Connie Brezik, CFP
As you can see from the abundance of tax software commercials on television, the tax season will come to an end once more. No pressure, but your objective is to file your tax returns correctly and on time. In simple terms, your total tax liability is less what you already paid for 2021 is what you will owe when you file your 2021 statements. If you repay it, you will be due a refund.
If you are a glutton for punishment and are developing your own tax returns, here is the first step: collect all of your documentation. This may include:
- W-2s from employers
- 1099s from interest, dividends, the sale of investments and real estate
- K-1s from partnerships and S-corporations in which you have ownership
- 1098s to show mortgage interest paid
- Letters from charities that document your charitable contributions.
And the list continues.
Taxes can be paid in during the year through withholding on payroll checks, IRA required minimum distributions, Social Security, and pension income. Many taxpayers also pay quarterly estimated tax payments. This process can be avoided by paying your tax liability four times a year. Therefore, you may compensate for any suffering in payments on your last paycheck of the year.
Although getting a tax refund feels more comfortable than writing a check, it''s a good thing to file your tax return! This means you let the government act as your interest-free bank.
If you do not pay enough during the year, you might be eligible for an underpayment penalty. Through tax planning throughout the year, you may avoid this situation as long as you have the opportunity to understand what amount to pay and when.
I suggest employing these tactics to avoid underpaying and overpaying the government.
- Instead of letting the government hold onto your hard-earned money throughout the year, its a wise idea to open a savings account and make a deposit each paycheck. This can be set up to happen automatically like clockwork. Its a great way to bankroll your vacation, save up for a car or pay for higher education. By doing this, you have control over your money. You do not have any control over your funds on deposit with the government/IRS.
- Be intentional about your money. You get a gold star if you start planning now for 2022. Since you are already in tax mode working on your 2021 tax returns, you might as well improve things for this year. You get to decide how much of your income is withheld for taxes. Estimate what you will owe for 2022 and adjust your withholding now for the rest of the year. Dont forget to complete a new W-4 and turn this into your payroll department. If your income or deductions change during the year, you can make further adjustments at that time.
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As a citizen of the United States, we all must pay what we owe, but we do not have to pay excessively. Prepare beforehand to minimize your tax liability. This may be done by:
- Bunching charitable deductions into every other year to exceed the new increased standard deduction.
- Deferring some income into the following year when you expect to be in a lower tax bracket.
- Doing a Roth conversion or taking more than your required minimum distribution (RMD) from your traditional IRA to take advantage of low tax brackets.
- Multiple-year tax planning may allow you to use the tax law to your advantage. The goal is to pay the least amount of tax legally possible over your lifetime. If you dont strategize over multiple years and only concentrate on this year, you may pay more tax than you need to.
Being in the driver seat by managing your own taxes is a breeze! If you don''t want to become an expert on income taxes, hire a tax professional (CPA or EA) and consult your financial advisor. Happy filing!
Connie Brezik, CFP, CPA, PFS, etc., is the author of this book.
With Buckingham Strategic Wealth, Connie Brezik is a Casper-based wealth advisor.
For educational purposes.
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