Three tax planning strategies to avoid any surprises
Tax reform made the “wait and see if I owe” approach to taxes riskier. Some people expecting refunds last spring ended up owing. Others got much lower refunds than they expected. The surprises could become even more pronounced next year.
Life changes such as a new spouse, new kid, new house, new job can make a tax return different from year to year.
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To avoid surprises when filing a 2019 tax return, get started now with three tax planning strategies.
The W-4 tells the employer how much federal income tax to withhold from each paycheck based on the employee’s marital status and the number of allowances they chose. The “right” number of allowances can change with common life events, making updates important. A life change could be something as significant as a new kid or buying or selling a house. Or, it could be something less dramatic, like a new budget with more money donated to charity.
Even without a life change, employees should still update their W-4. After tax reform, the IRS changed how employers calculate how much tax to withhold. The IRS changes made most people’s paychecks increase on their own. In some cases, the increased paychecks more than accounted for the tax cut from tax reform. That meant some owed taxes, while others got a smaller refund than expected.
The good news is that you can fix your tax outcome by updating your W-4. Even better: the sooner you update your W-4, the more payroll periods you’ll have that reflect the changes, and you may not notice much of an impact.”
2. ESTIMATE INCOME TO AVOID AN UNDERPAYMENT
Tax planning starts with income. But estimating income can be difficult, even for people with the same job all year. Hours, wages, raises, bonuses and more can fluctuate. Estimating income becomes exponentially more difficult for the self-employed and small business owners.
But correctly estimating income is an important step in preventing underpayment penalties. To avoid the estimated tax penalty, everyone must pay 90 percent of their current-year tax or 100 percent of their previous-year tax. The deadline is January 15, three months earlier than the April 15 tax filing deadline.
They can pay what they owe by making estimated tax payments four times a year. Quarterly estimated tax deadlines are in April, June, September and the following January. People who have an employer, or a spouse with an employer, may have another option. Instead of making estimated payments, they could increase their withholding enough to cover their other tax.
3. UPDATE YOUR INFORMATION WITH A HEALTH INSURANCE MARKETPLACE
Those with health insurance through a state or federal marketplace may qualify for the advance premium tax credit (APTC), which helps make their premiums more affordable. The tax credit goes directly to the health insurance provider throughout the year. How much depends on estimates the individual made before 2019 even began. If those estimates are inaccurate and too much went toward their premiums, they could have to repay it when they settle up on their tax return.
To avoid having to repay the advance credit, make as accurate an estimate as possible. The estimate will be more accurate if people immediately notify the marketplace of any changes to their household or income.
As the year wears on, people will get an even better idea of the life changes and financial situations impacting their 2019 tax return. But the runway for meaningful but subtle change will shorten.
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If you think that you may need help filing your 2018/2019 tax return or past due tax returns, you may want to partner with a reputable tax relief company who can help you get the max refund and reduce your chances for an IRS AUDIT.
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